Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
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.
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]
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.
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.
Comments
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.
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). 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
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.