Matt Kaufman, Senior Vice President and Head of ETFs for Calamos Investments, joined Keith Black, Managing Director of RIA Channel, to discuss the active ETF market and why corporate issuance of convertible bonds may soon be growing.
Active ETFs have the potential for significant asset growth. While active ETFs make up 30% of all ETF flows, they have only reached 6% of the total ETF universe’s AUM. Active ETFs that invest in rules-based products with an active edge are seeing strong flows.
Kaufman notes that rising interest rates are likely to lead to a renaissance in convertible bond issuance. Two years ago, option-free bonds issued by BB corporations yielded less than 4%. Corporations would have to offer an 8% yield to issue similar bonds today. In the next five years, investment-grade and high-yield corporate issuers face a maturity wall of over $4 trillion in debt that needs to be refinanced. With the cost of credit doubling in recent years, many issuers are likely to consider the convertible bond market for their debt issuance or refinancing. Convertible bonds have a lower coupon than the option-free debt of the same firm, as investors can participate in the upside of the issuer’s stock through an embedded equity call option.
Calamos is the largest US convertible bond manager with convertible bond mutual funds that focus on total return. Passive exposure to convertibles can vary over time between equity-sensitive and fixed income-sensitive. Equity-sensitive convertible bonds behave more like stocks because the stock options are in-the-money. Fixed income-sensitive convertible bonds behave more like bonds because the stock options are out-of-the-money. Calamos launched its first convertible bond ETF in October 2023: Calamos Convertible Equity Alternative ETF (CVRT). This ETF focuses on active management in the equity-sensitive convertible bond universe.
The current interest rate environment has created deeper-than-average discounts in the closed-end fund market. In fact, current discounts are at historic lows relative to their 5-year median (-11.8% current vs. -7.4% 5-year median). This may create a timely opportunity for investors to source potential higher market distributions and higher returns over time should the discounts narrow.*
Join the Calamos team to learn more about the current state of the closed-end fund market and a strategy designed to capture market inefficiencies while delivering high monthly income along the way.
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*Source: Morningstar as of 12/31/2023. These stats are based on the median of all US listed CEFs. Past performance is not indicative of future results. The performance of the Fund will differ, and many vary materially from that of any index. There is no assurance the Fund will achieve or maintain its investment objective. Closed-end fund data represents all US listed closed-end funds. The other category data represents all US investments in each respective Morningstar open end category, which includes mutual funds and ETFs.