The overwhelming majority anticipate that rate hikes will eventually dissipate, but there’s no telling what the U.S. Federal Reserve will do. As such, staying mobile in the fixed income market is important.
The Fed has been battling stubborn and sticky inflation, but the June rate pause could mean the central bank has reached a proverbial fork in the road. Continued rate hikes could spin the economy into a recession and avoid a “soft landing,” but at the same time, the Fed can’t let rising consumer prices get out of control.
“It takes time for these to have their full effect, so given that inflation is moving in the right direction, that interest rates are high, I would just wait and see what happens next,” said Nobel Prize-winning economist Christopher Pissarides, a professor at the London School of Economics, in a CNBC article.
“I don’t expect anything to happen to make them want to increase interest rates more, but I would definitely wait this time,” Pissarides added.
Fed Rate Flexibility and Active Management in One ETF
If the capital markets are expecting the Fed to zig, but instead, they zag, investors don’t have to continuously re-adjust their portfolios with variable rate securities. Furthermore, an actively managed strategy can allow for portfolio adjustments on the fly—both these features are inherent in the Invesco Variable Rate Investment Grade ETF (VRIG).
Per its fund description, VRIG seeks to invest in floating-rate US Treasuries, government-sponsored agency mortgage-backed securities, US Agency debt, structured securities, and floating rate investment-grade corporates. This allows for a well-diversified portfolio pliable with the current market environment, irrespective of whether the Fed tightens or loosens monetary policy.
That diversification also speaks to its over 200 holdings in its fixed income portfolio. For those fixated on yield, the 30-day unsubsidized yield comes in at 6.06% (as of July 18).
The majority of the fund consists of holdings with an average maturity of one to five years, thereby mitigating rate risk. Its top holding consists of United States Treasury Floating Rate Notes (also as of July 18), reiterating its focus on quality, investment-grade debt with U.S. government bonds.
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