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ICVT strategy and wallet

The iShares Convertible Bond ETF (ICVT) followed Bloomberg Barclays US Convertible Cash Pay Bond > $250 Million Index since 06/02/2015. The expense ratio is 0.20% and the 12-month distribution yield is 1.14%.

As described in the prospectus, “the universe of securities eligible for inclusion in the underlying index includes securities denominated in US dollars with maturities of 31 days or more and an outstanding nominal value of $250 million. or more.” The index is market capitalization weighted and rebalanced once a month.

The fund has 346 holdings, exclusively pay convertible bonds in cash. It is a class of convertible bonds offering the possibility of converting into a predefined number of ordinary shares of the issuer, but not requiring conversion. Other categories of convertible bonds (zero coupon, preferred and mandatory convertible bonds) are not eligible. Due to the built-in optionality, ICVT is classified by some brokers as a derivative product in the same category as leveraged, inverse and volatility ETFs. It may require some tweaking in your trading permissions settings if you want to buy it.

Optionality allows growth companies to borrow money at a lower rate and potentially avoid paying principal, if the bond is converted (in this case, the debt is “paid” by ordinary shareholders diluted). The optionality is also attractive to lenders wishing to combine fixed income securities with equity price speculation. Therefore, the ICVT portfolio is growth oriented and, as a hybrid asset, its behavior is part equities and part fixed income. ICVT’s heaviest sectors are technology and consumer discretionary.

ICVT sectors

ICVT sectors (graph: author, data: iShares)

The following table lists the top 20 issuers for approximately 28% of the portfolio. Each issuer can correspond to several bonds held in ICVT.

name

Sector

Weight (%)

PALO ALTO NETWORKS INC (PANW)

Technology

3.05

LIBERTY MEDIA CORP

Communication

2.96

DISH NETWORK CORP (DISH)

Communication

2.34

SEA LTD (SE)

Technology

1.8

DEXCOM INC (DXCM)

Non-cyclical consumption

1.32

WAYFAIR INC (W)

Cyclical consumption

1.31

SNAP INC (SNAP)

Technology

1.29

SQUARE INC (SQ)

Technology

1.26

SPLUNK INC (SPLK)

Technology

1.21

ETSY INC (ETSY)

Cyclical consumption

1.19

PIONEER NATURAL RESOURCES CO (PXD)

Energy

1.18

SOUTHWEST AIRLINES CO (LUV)

Transport

1.18

FORD MOTOR CO (F)

Cyclical consumption

1.16

BILIBILI INC (BILI)

Communication

1.13

AKAMAI TECHNOLOGIES INC (AKAM)

Technology

1.09

OKTA INC (OKTA)

Technology

1.01

BILL.COM HOLDINGS INC (BILL)

Technology

1

TWITTER INC (TWTR)

Communication

0.99

ZILLOW GROUP INC (Z)

Cyclical consumption

0.96

EXACT SCIENCES CORP (EXAS)

Technology

0.93

The portfolio has changed significantly since my March 2021 review: at that time the largest issuer was Tesla (TSLA) with a weight of 3.45%.

In summary, ICVT is a portfolio of over 300 corporate bonds with a weighted average coupon rate of 0.95% and a weighted average maturity of 3.5 years, attached to specific call options that are not negotiated separately.

Historical behavior

Due to its characteristics as a hybrid asset, the behavior of the ICVT is closer to a stock market index than a bond index. Its correlation coefficient with SPY has been 0.8 since its inception. The following table shows similar risk metrics over this period (drawdown and volatility).

Annual return

Sample

Sharpe report

Volatility

ICVT

12.00%

-32.18%

0.78

15.63%

TO SPY

13.77%

-33.72%

0.94

14.82%

Data calculated with Portfolio123

The following chart plots the equity value of $100 investments in ICVT and SPY since inception.

ICVT vs. SPY

ICVT vs SPY (Author)

ICVT Tactical Rotation

Tactical allocation strategies involve overweighting assets with the highest probability of future gains. This probability is often arbitrarily measured by past performance. Countless variations are possible depending on the performance metric, calculation of weighting, look-back period, frequency of decisions, list of assets, number of positions. The following table follows a strategy with only two ETFs: ICVT and iShares 7-10 Year Treasury Bond ETF (IEF). Each week, it goes 100% long in the ETF with the highest 3-month return, or in cash if both have their prices below the 200-day simple moving average. This ICVT-IEF rotation pattern is compared to two bond benchmarks: an ETF on the total bond market (BND) and the IEF itself.

Since the creation of the ICVT

Annual return

Sample

Sharpe report

Volatility

ICVT-IEF Rotation

5.20%

-11.02%

0.81

5.55%

Bond Benchmark (BND)

2.50%

-10.67%

0.6

3.28%

EIF

1.31%

-4.74%

0.21

2.59%

Calculations with Portfolio123. Past performance, real or simulated, is not indicative of future returns.

Carry

ICVT’s portfolio is overweight in technology, but holdings can change significantly over time. It delivered an exceptional performance in 2020 due to its concentration in companies with strong momentum. Returns from 2015 to 2019 and into 2021 have been much less attractive. The ICVT correlation with equities can boost the performance of a bond ETF portfolio in a bull market. It can also be used in a tactical allocation strategy with other bond ETFs. The ICVT-IEF rotation shown here is a simplistic example. QRV Bond Rotation is based on the same idea.