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%.
Bond ETF investors can move down the yield curve with shorter duration bond funds. Duration is a measure of a bond fund’s sensitivity to changes in interest rates, so a shorter duration reflects a lower negative response to higher interest rate.
Credit risk is not high with VRIG. Just over 17% of the fund’s holdings have ratings of BBB or lower while nearly a third are rated AAA. Even with that tidy credit profile, VRIG has a decent 30-day SEC yield of 2.94%.
VRIG charges 0.30% per year, or $30 on a $10,000 investment.
For more information on the fixed-income market, visit our bond ETFs category.