The inflation outlook looks increasingly uncertain, and despite the Fed signaling its intent to cut rates this year, the reality is no one really knows for sure what happens next. If you’re an investor looking for stable income and low portfolio duration to remove the risk that rates don’t fall or even rise further, you might want to consider the Invesco Variable Rate Investment Grade ETF (NASDAQ:VRIG). VRIG is an actively managed ETF that primarily invests in high-grade variable rate instruments. The fund’s objective is to generate current income while maintaining a low portfolio duration. A secondary objective is capital appreciation.
The appeal of the fund is the variable rate dynamic, which explains why the yield has risen so substantially in the last two years, with a current yield of 6.2%
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A Look At the ETF’s Holdings
The VRIG ETF’s portfolio is diverse and includes a mix of floating-rate U.S. Treasuries, government-sponsored agency mortgage-backed securities, U.S. agency debt, structured securities, and floating-rate investment-grade corporate securities. It can also invest up to 20% in non-investment-grade securities. The fund’s top holdings are predominantly in U.S. Treasury Floating Rate Notes and high-grade corporate bonds issued by companies such as Bank of America Corp. and Charles Schwab Corp.
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Importantly, the credit quality of the fund’s holdings is rated highly, signaling little default risk. This to me is important given my concerns around a credit event.
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Sector Composition and Geographic Allocation
VRIG has a significant allocation to securitized, corporate, and treasury sectors. As of the end of 2023, the fund had 40.63% of its portfolio in securitized securities, 37.64% in corporate securities, and 21.73% in Treasuries.
Geographically, the fund is heavily weighted towards the United States, with 84.25% of its portfolio invested in U.S.-based assets. The remaining portion is spread across the United Kingdom, Canada, the Netherlands, France, Germany, Australia, Sweden, Japan, and Spain.
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Comparing VRIG with Peer ETFs
VRIG and the iShares Floating Rate Bond ETF (FLOT) both cater to investors looking for exposure to floating rate bonds, minimizing interest rate risk. VRIG, an actively managed fund by Invesco, focuses on investment-grade, variable rate instruments, primarily U.S. dollar-denominated and U.S.-issued. On the other hand, FLOT is a passively managed ETF by iShares that tracks the Bloomberg US Floating Rate Note < 5 Years Index, emphasizing short-maturity, high-quality notes with 82% rated A or higher. FLOT has a larger asset base, lower expense ratio of 0.15%, making it more appealing for cost-conscious investors seeking stability and lower volatility in a rising rate scenario.
VRIG relative to FLOT has outperformed, but not by much.
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Weighing the Pros and Cons
One of the most significant advantages of investing in VRIG is its low duration (close to 0), which reduces sensitivity to interest rate changes. This feature, coupled with its focus on investment-grade securities, makes it an attractive option for conservative investors seeking stable income.
However, the fund’s reliance on floating-rate securities means its yield could decrease if short-term interest rates fall. Moreover, despite its emphasis on high-grade bonds, the fund does carry some credit risk, especially from its exposure to non-investment-grade securities and corporate bonds.
Should You Invest in VRIG?
The decision to invest in VRIG should be based on your investment goals, risk tolerance, and market outlook. If you believe that interest rates will remain high or increase, and you’re comfortable with the fund’s credit risk, VRIG could be a good fit. Its yield is attractive, and its low duration provides some protection against rising rates. However, if you expect rates to fall or you’re concerned about credit risk, other investment options might be more suitable.
This is a good fund overall and can fit well within a conservative asset allocation mix. Just understand that it will perform differently whenever we return to a falling rate environment again.
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