Virtus Convertible and Income Fund II: Strategy and Analysis

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  Published in Stocks and Investing on Sun, May 5rd, 2026 by The Motley Fool
      Locale: UNITED STATES

Understanding the Fund's Strategy

The Virtus Convertible and Income Fund II operates by investing in convertible securities. These are hybrid instruments that typically start as bonds--providing a fixed income stream and a claim on assets--but can be converted into a predetermined number of common shares of the issuing company. This structure is designed to offer investors a "best of both worlds" scenario: the downside protection of a bond combined with the upside potential of an equity investment.

However, the effectiveness of this strategy is heavily dependent on the macro environment, particularly interest rates and equity market volatility. Because convertible bonds are sensitive to both credit spreads and stock price movements, the fund's performance is an intersection of fixed-income and equity market dynamics.

The Common Share Dilemma

The primary argument for passing on the common shares of the Virtus Convertible and Income Fund II centers on the relationship between the market price and the NAV. In many CEFs, the common shares trade at a premium or a discount to the actual value of the underlying assets. When a fund trades at a significant premium, the investor is effectively paying more for the assets than they are worth on paper, which can erode total returns over time.

Furthermore, the volatility associated with common shares in a leveraged convertible fund can be substantial. While the goal is income generation, the price fluctuations of the common shares may not align with the steady income goals of a conservative investor, especially if the fund's leverage increases the risk profile during market downturns.

The Case for Preferred Shares

The analysis posits that the preferred shares offer a more compelling risk-adjusted return. Preferred shares typically occupy a higher position in the capital structure than common shares, meaning they have a priority claim on dividends and assets in the event of liquidation.

For an investor seeking "alpha," the preferred shares of the Virtus fund provide a more stable yield and a different volatility profile. The attraction lies in the ability to capture the income generated by the convertible portfolio without the same level of exposure to the price swings and premium fluctuations that plague the common shares. By focusing on the preferreds, an investor is essentially targeting the income engine of the fund while avoiding the speculative elements of the common equity market.

Key Technical Details

To summarize the most relevant details regarding the fund's current positioning:

• Asset Class: The fund focuses on convertible securities, which blend bond-like stability with equity-like growth potential.
• Value Divergence: There is a noted disparity between the attractiveness of the common shares and the preferred shares.
• Income Focus: The fund is designed for income generation, but the method of capturing that income (via common vs. preferred) significantly alters the risk profile.
• NAV Relationship: The market price relative to the Net Asset Value is a critical factor in the decision to avoid the common shares.
• Risk Factors: The portfolio is subject to interest rate fluctuations and the creditworthiness of the convertible bond issuers.

Conclusion

While the Virtus Convertible and Income Fund II employs a sophisticated strategy to capture gains from hybrid securities, the vehicle through which an investor accesses these assets matters. The common shares may present a less favorable entry point due to pricing inefficiencies and volatility. In contrast, the preferred shares are highlighted as the primary source of value, offering a more streamlined path to capturing the fund's inherent income potential while minimizing the risks associated with common equity premiums.