An Active Idea For Managing Rate Risk

With some market observers forecasting more upside for Treasury yields, investors continue looking for avenues to mitigate interest rate risk while maintaining solid income profiles.

Numerous fixed income exchange traded funds look to accomplish that objective. The Invesco Variable Rate Investment Grade Portfolio (NASDAQ: VRIG) is actively managed and looks to lower duration risk with a portfolio of investment-grade securities.

VRIG can “invest in floating rate US Treasuries, government sponsored agency mortgage-backed securities, US Agency debt, structured securities and floating rate investment grade corporates,” according to Invesco.

Bond funds hold a collection of debt with varying maturities, buying and selling debt securities to maintain their short-, intermediate- or long-term strategy. When it comes to bond ETFs, investors should look at the duration, or a bond fund’s measure of sensitivity to gauge their investment’s exposure to changes in interest rates – a higher duration means a higher sensitivity to shifts in rates.

The Strategy Behind ‘VRIG’ ETF

In the current rising rate environment, a number of financial advisors are suggesting investors to treat fixed income like the sun and limit prolonged exposure. In this case, as the Federal Reserve’s predilection for raising interest rates does not appear to be changing anytime soon, it’s best to take advantage of these short-term rate adjustments by limiting duration.

VRIG, which is just over two years old and has nearly $448 million in assets under management, holds almost 180 bonds. The fund has an effective duration of just 0.21 years, according to issuer data. The weighted average coupon of VRIG’s holdings is 3.68%.