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Convertible Equity Linked Notes?

Looking at a new ETF (INCM) from Franklin. 60% fixed income, 20% equity and 20% “convertible equity linked notes”.

- How risky are CELNs compared to BB junk bonds?

- Are they relatively uncorrelated to junk or are they more likely to move in tandem with junk?

- Might this just be another term for “convertible bonds”?

Thanks for any insights.

Comments

  • A convertible note/bond from company A has the same underlying equity of A. So, if the stock of A rallies, the convertible also rallies (and on conversion, the company A is debt free!); if A tanks, the convertible may become busted, i.e. may act just like a straight bond. Convertibles are often issued by companies to lower their debt servicing and they are used more by early-stage companies and startups. Convertibles are often called hybrids (not to be confused with stock-bond hybrids or allocation funds).

    Convertible Equity linked note is a combo note/bond plus options on some stock or index. A wide variety of combo and details are possible - those details can be very complicated.
  • Thanks. Sounds like a convertible bond then. Wonder why the difference in terminology.
  • hank said:

    Looking at a new ETF (INCM) from Franklin. 60% fixed income, 20% equity and 20% “convertible equity linked notes”.

    ETF page
    It helps to provide a link.

    What the page actually says is: "Convertibles/Equity-Linked Notes". Convertibles and ELNs currently comprise 20% of the fund.

    Summary Prospectus
    The fund may invest up to 30% in equity index linked notes, and up to 10% in equity linked notes (typically linked to a single stock).
    Investments in ILNs [index-linked notes] often have risks similar to securities in the underlying index, which could include management risk, market risk and, as applicable, foreign securities and currency risks. In addition, since ILNs are in note form, ILNs are also subject to certain debt securities risks, such as interest rate and credit risks. ... An investment in an ILN is also subject to counterparty risk, which is the risk that the issuer of the ILN will default or become bankrupt.
    ...
    Investments in ELNs often have risks similar to their underlying securities [and other risks as above]
    Fidelity has a description of how some structured products (equity index linked debt) work. As Yogi wrote, these are not simple investment vehicles.
    https://www.fidelity.com/fixed-income-bonds/structured-products
  • edited September 2023
    Thanks @msf. Spot on. Although I didn’t look at the prospectus, the Franklin promotional work-up contains a multi color bar chart showing the allocations. And, yes, they combine the convertible bond & equity linked notes on a single line, but do reference both as you already stated. I missed it.

    https://www.franklintempleton.com/investments/options/exchange-traded-funds/products/36262/SINGLCLASS/franklin-income-focus-etf/INCM

    Apparently the new ETF is run by the same team that has run the 5-star Franklin Income Fund (FKIQX). Strategies look very similar to me. But I did note that FKIQX tanked badly in 2008 - in sympathy with what some lower tier junk bond funds did. Gives one pause. I’ll pass for now.
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