Andrew Bary

Convertible securities are having a strong 2025, topping most other major U.S. asset classes, helped by strength in materials, technology, and an assorted group of growth companies that are represented in the market.

The stock/bond hybrids returned about 14% through Friday, based on the ICE BofA US Convertibles index. That's ahead of the S&P 500, which has returned 13% in the same span, as well as the S&P MidCap 400 and the S&P SmallCap 600, which are up 5% and 4% for the period, respectively. A leading junk-bond exchange-traded fund, the iShares iBoxx $ High Yield Corporate Bond, has returned 7% as of Friday.

The largest convertible ETFs are doing even better than the ICE BofA US Convertibles index. The $4.4 billion SPDR Bloomberg Convertible Securities ETF has returned 15% this year, while the $2.8 billion iShares Convertible Bond has yielded gains of 16% Both ETFs hit new 52-week highs earlier in the session Tuesday.

There are a group of active funds by such managers as Calamos, Fidelity, and Columbia.

This is one of the better years of absolute and relative performance for convertibles in a decade. Normally, convertibles return less than stocks in a rising market, since converts are designed to provide most of the return of the underlying stocks -- while protecting investors on the downside.

In 2024, the ICE BoA index returned 11% against 25% for the S&P 500 index. Many convertible issuers are not in the S&P 500, making the S&P 500 an imperfect benchmark.

"It's one of the leading asset classes in 2025 and ahead of stocks and high yield," says Michael Youngworth, the director of convertible securities research at BofA Securities. "It's benefitting from the rally in high-beta shares," a reference to stocks that tend to be more volatile than the overall market.

Top contributors to the market's strength this year are convertibles from Bloom Energy, MP Materials, Seagate Technology (a top stock in the

S&P 500 this year), and Boeing.   Barron's wrote favorably on the Boeing convertible preferred when it was issued last year. That issue has gained about 40% since, as Boeing shares have rallied. 

One big overseas issuer is Alibaba Group Holding, the Chinese e-commerce and cloud computing giant, whose stock and converts are up sharply this year. Th e company recently issued a $3.2 billion convertible issue.

Retail investors don't have much exposure to the $325 billion convertible market, despite its advantages. Complexity is a deterrent to individuals -- and most financial advisors are unfamiliar with the market.

The sector is dominated by institutions, many of whom are arbitrageurs, who buy convertibles and sell short the issuer's common shares. This has been a good year for convertible arb strategies, as credit spreads have tightened.

Most convertibles trade in an over-the-counter market like other bonds -- although convertible preferred, including a big issue from Boeing, generally is traded on the New York Stock Exchange or Nasdaq Stock Market like equities.

U.S. convertible issuance has run at $75 billion so far this year, and is on pace to top last year's total of $84 billion, according to BofA research.

The largest new issues this year have been from Doordash, Gamestop, KKR, Super Micro Computer, and Strategy.

In a client note, Youngworth described current market conditions as a "Goldilocks" for issuers given ultra low borrowing rates -- reflecting tight credit spreads and high volatility on many stocks.

He wrote that deal pricing is at the "most aggressive levels we've seen in the past 3 years (notably, nearly 50% of deals do not pay a coupon). What's more, more than half of this year's global volumes have come from issuers raising new convertible bonds with no explicit use for fresh capital other than general corporate purposes or to 'fund growth', the most we've seen since the pandemic-era financing boom." The issues with no coupon have an interest rare of zero.

The average interest rate in the market is now 2%, with conversion premiums averaging about 35%.

Given the market gains and issuer-friendly deals, investors may want to exercise some caution about convertibles, but this is an underappreciated asset class that historically has offered considerably better performance than the bond market while tracking stocks.

Write to Andrew Bary at andrew.bary@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

September 16, 2025 15:02 ET (19:02 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.