CWB: A New(ish) Convertible Bond ETF

I have never been a particularly big fan of convertible bonds, but from time to time, these investments can make a good deal of sense.

Launched four months ago (and still qualifying as “new” according to my warped ETF chronograph), the SPDR Barclays Capital Convertible Bond ETF (CWB) is designed to track the price and yield performance of the Barclays Capital U.S. Convertible Bond >$500MM Index.

The table to the right shows the ETFs top holdings as of yesterday’s close, which include a top three of Bank of America (BAC), Freeport-McMoRan (FCX) and Amgen (AMGN). This same snapshot of current top ten holdings can be found here.

Since the launch of CWB on April 16^th, the bull market performance of this ETF has matched the SPX almost step for step, with lower volatility. In the chart below, CWB is represented by the red line, the SPX is in blue, and the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) is shown in green. This chart is an almost perfect illustration of why convertible bond ETFs (or closed-end fund or mutual fund) can be a powerful addition to one’s portfolio. At its best, in bull markets, convertibles have an upside comparable to stocks, with less downside risk. At their worst, which is generally in non-trending markets or bearish markets, the lower yield and expense of owning options that do not appreciate makes convertibles inferior to standard bonds.

Of course, options savvy investors will probably wish to buy their own bond ETF and cherry pick their favorite options plays, but for those who wish to forego a customized approach and stick with an off-the-shelf product, CWB is – for the moment at least – the only ETF which is up to the task.

[graphic: StockCharts]

Institutional Interest High in These Nine Large Caps

Stocks of all sizes and shapes are trading up today, but which ones will continue to do well if the market holds up?

In the graphic to the right (courtesy of Yahoo) I highlight nine large cap stocks that appear to be the biggest targets of institutional interest not just today, but when the markets moved up in spurts last week too. Those that made the cut did so on the basis of several price factors and several volume factors. The list consists of five technology names (MSFT, AAPL, RIMM, ORCL, and DELL), two mining/metals stocks (RIO, FCX), and two energy stocks (PBR and CHK). Interestingly, two of the nine companies are based in Brazil.

At the very moment at least, these nine companies look to be at the top of the heap: quality stocks at attractive valuations, with considerable institutional interest. I would expect these names to continue to lead the way in subsequent bull moves.

Note that one company on this list may be somewhat of a special case. Chesapeake Energy (CHK) CEO Aubrey McClendon was forced to sell “substantially all” of his 33 million shares last week to meet a margin call. With that forced selling completed, the stock is bouncing back today.

VIX Oversold

At 17.48, the VIX is now 17% below its 10 day SMA and 24% below its 20 day SMA, levels not seen since the end of June 2006. While I am not going to predict that the VIX will jump 43% over the next ten days like it did the last time it was this far below the two SMAs, history suggests that the VIX will start moving up from here and that the broader indices, some of which are approaching previous highs, are due for a selloff.

For the record, the chart below show the VIX with respect to its 10 day simple moving average, with the dotted green lines tracking +10% and -10% from that SMA and the solid green lines indicating the +20% and -20% levels from the 10 day SMA. As a general rule, mean reversion is increasingly likely the farther the VIX strays from the 10 day SMA.

I am inclined to think that the new floor in the VIX for the next month or so will be in the 16-17 range, but that is no more than a guesstimate. How the various sentiment indicators act as we test old highs will tell us a lot about the strength of this decidedly long in the tooth bull. Better not to anticipate, but to prepare for several different contingencies – and keep an eye on the VIX for some clues.

Also, apropos of yesterday's commentary, while the DJIA may be +80 at the moment, I note that many of the recent momentum stocks are in the red: BIDU, GRMN, LVS, BCSI, FWLT, MA, FSLR, AAPL, FCX, PCU, CMI, etc. Keep an eye on this development too.