This Overlooked Asset Class Is Getting an AI Boost

The convertible-securities market is having its day in the sun. Strong equity markets, rising financing needs, and issuance from companies tied to the artificial intelligence buildout have fueled activity. US companies issued $90 billion of convertible debt in the first half of 2026, already three-quarters of all of 2025’s total, according to ICE BofA Global Research data. Performance has been strong as well: the ICE BofA All US Convertibles Index returned 18.0% in 2025 and gained 21.1% in the first half of 2026, renewing investor interest in the asset class.

Convertibles can play a role in a diversified portfolio, but before you consider adding an exchange-traded fund or mutual fund that owns them to yours, here’s a refresher on what they are, how they behave, and their unique risk/reward profile.

What Is a Convertible?

A convertible bond combines debt and equity. It typically pays interest and returns principal at maturity but also provides its holder the option to exchange the bond for a predetermined number of shares if the stock rises sufficiently. Because investors receive that potential stock market upside, they generally accept a lower interest rate than they would on an ordinary bond, sometimes zero.

For example, Lumentum LITE, a maker of optical components for AI data centers, in September 2025 issued $1.265 billion of bonds paying a 0.375% interest rate that could be converted to stock at $187.77. The stock, trading at about $134.0 at issuance, reached $954.49 by Sept. 21, 2026, a cumulative 612% gain. The conversion value of each $1,000 convertible bond, however, rose to about $5,083, a relatively smaller 408% cumulative gain, not counting interest income. The convert lagged the stock because the shares first had to rise 40% before conversion value equaled the principal, but it still delivered equitylike returns with a bit of income and some downside protection, subject to Lumentum’s credit risk.

That’s not a guarantee, though. Most convertibles are unsecured and can trade well below face value if credit quality deteriorates. Nearly 79% of the ICE BofA All US Convertibles Index’s bond holdings, by market value, carried no credit rating, as of June 30, 2026.

Convertibles also become more stocklike as their prices rise above the conversion level, causing portfolios that own many of them to act more like stock funds than bond funds by increasing both upside and downside volatility.

The convertibles market can also reflect the themes in the market attracting money. In 2021, when investor demand and issuance were high, growth companies at the time such as Airbnb ABNB, Peloton PTON, and Snap SNAP issued zero-coupon convertible bonds on generous terms. Airbnb raised $2 billion at a conversion price 60% above its stock, a bet that investors lost. Shares peaked near $220 weeks before the deal finalized and never traded above $195 again. For the notes’ full five-year life, until Airbnb repaid them in March 2026, holders received no interest or equity upside, just their principal back at maturity. Peloton’s stock fell 98% from its January 2021 peak to single digits by mid-2024, erasing the value of its conversion option and leaving bondholders reliant on the company’s ability to refinance or repay the debt.

A different theme drives today’s convertibles market: AI. Issues from Western Digital WDC, Seagate STX, Lumentum, and Bloom Energy BE have benefited from enthusiasm for AI-related storage, networking, and power demand. AI fervor has improved market breadth and liquidity, but leaves it more exposed to the fortunes of one theme.

How Have Convertible Securities Performed?

Performance has been strong. The ICE BofA All US Convertibles Index gained 21.1% in the first half of 2026, compared with the S&P 500’s 10.2%, the Russell 2000’s 22.6%, and Bloomberg US Corporate High Yield Index’s 2.0%.

A third-quarter AI-related stock retreat cut into those gains. From June 30 through Sept. 24, the convertibles benchmark fell 5.3% while the S&P 500 rose 3.0%, trimming the index’s year-to-date gain to 14.7% and showing how convertibles can shed much of their downside cushion once large gains make them behave more like the underlying stocks. It was also a reminder of how converts can crowd around dominant themes, such as AI infrastructure, leaving investors with more concentrated exposure than even the broad equity market.

Open-end fund demand, which largely consists of active funds, has remained weak despite strong performance. The convertibles Morningstar Category shed an estimated $897 million in 2025 and another $210 million through August 2026, continuing an outflow trend that began in 2022. Meanwhile, passive ETFs such as the iShares Convertible Bond ETF ICVT and the State Street SPDR Bloomberg Convertible Securities ETF CWB attracted a combined $4.6 billion in net inflows during the 12 months through Aug. 31. Flows into the category were negative in both vehicle types in 2022 and 2023, but more recently have been positive, thanks to passive ETF flows.

Similar to active equity funds, investors are voting for passive ETFs with their feet. With convertibles, though, there are trade-offs between choosing an active mutual fund or an ETF. IShares Convertible Bond and SPDR Bloomberg Convertible Securities charge expense ratios of 0.20% and 0.40%, respectively, versus a 1.00% median for actively managed convertible funds, a gap of 60 to 80 basis points a year. The average active convertible fund’s performance also has not kept pace: $100 invested in the average active fund at the end of 2018 grew to about $237 by Aug. 31, 2026, versus $274 in iShares and $259 in SPDR. Some managers have done well: Franklin Convertible Securities FCSZX and Virtus Convertible & Income NCV have beaten both ETFs, net of fees, since each ETF’s own launch, and Columbia Convertible Securities NCIAX and NYLI MacKay Convertible MCNVX have beaten SPDR over its longer history. But those are the exceptions: only four of 55 active share classes beat iShares since its 2015 inception, and 12 of 41 beat SPDR since 2009. Perhaps active managers’ judgment on deal quality, credit risk, and market concentration will pay off when the AI theme cools or corrects. Until then, beating convertibles’ indexes has been just as hard here as in other categories.

Below Are Several Convertible Strategies Covered by Morningstar.