Exchange Traded Funds (ETFs)

A Smaller Fund that Focuses on the U.S. Floating-Rate Bond Market

The Invesco Variable Rate Investment Grade ETF (VRIG) is an exchange-traded fund (ETF) that focuses on increasing its shareholders’ income through holding floating-rate debt securities while also maintaining a low portfolio duration and a focus on capital appreciation.

Generally, the fund will allocate around 80% of its net assets (along with any borrowed money) into a portfolio of investment-grade, variable rate instruments that are U.S. dollar denominated and U.S. issued. These include floating rate U.S. Treasuries, government-sponsored agency mortgage-backed securities, U.S. agency debt, structured securities and floating rate investment-grade corporates.

The other 20% is invested in non-investment-grade securities. Overall, VRIG’s portfolio has the indications of being a low-risk portfolio since the majority of its assets are in AAA, AA or A backed securities. Plus, there are no assets invested in what have been popularly called “junk bonds.”

As a result, some of the fund’s holdings are in U.S. government bonds, Structured Agency Credit Risk Debt Notes, Invitation Homes, Freddie Mac MACS, Athene Global Funding, Federal Home Loan Mortgage Corporation and PHEAA Student Loan Trust Series. However, the investment in student loans could be a source of potential trouble to come.

With the comparatively recent news that student loan debt has surpassed credit card debt for the first time and the Democratic Party has pledged to abolish all student loan debt if it regains power in the 2018 mid-term elections, such debt obligations are increasing in risk for investors.

Furthermore, while VRIG does invest in other countries around the world, it disproportionately invests in the United States at 89.74%. The fund invests much less in countries such as Japan, with 2.29% of the portfolio, the United Kingdom, 2.11%, and Switzerland, 1.86%, meaning VRIG is geared towards investors seeking exposure to U.S. debt securities.

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Here, it is also important to note that the fund currently has $425.19 million assets under management, has a $3.10 million average daily trading volume and has an average 60-day spread of 0.04%. It also has an expense ratio of 0.30%, meaning that it is relatively cheap to hold in comparison to other exchange-traded funds.

At the same time, over the course of the past three years, the returns from VRIG holdings have been growing at a slower rate than the segment benchmark. For instance, VRIG holdings have grown 2.15% over the course of the last year but the Bloomberg Barclays U.S. Floating Rate Note Index has risen 2.45% over the same period.

Chart Courtesy of stockcharts.com

In short, while VRIG does have several advantages over some of its peer funds, it’s not without some considerable risks. Interested investors should to their due diligence to decide whether the fund is suitable for their portfolios.

Jim Woods

Jim Woods is a 20-plus-year veteran of the markets with varied experience as a broker, hedge fund trader, financial writer, author and newsletter editor. Jim is the editor of Intelligence Report, Successful Investing, the Bullseye Stock Trader, and The Deep Woods (formerly the Weekly ETF Report). His books include co-authoring, “Billion Dollar Green: Profit from the Eco Revolution,” and “The Wealth Shield: How to Invest and Protect Your Money from Another Stock Market Crash, Financial Crisis or Global Economic Collapse.” He’s also ghostwritten many books and articles, as well as edited content for some of the investment industry’s biggest luminaries. His articles have appeared on many leading financial websites, including StockInvestor.com, InvestorPlace.com, Main Street Investor, MarketWatch, Street Authority, Human Events and many others. Jim formerly worked with Investor’s Business Daily founder William J. O’Neil, helping to author training courses in the CANSLIM stock-picking methodology. The independent firm TipRanks rates Jim the No. 3 financial blogger in the world (out of more than 6,000). TipRanks calculates that, since 2012, he's made 361 successful recommendations out of 499 total, earning a success rate of 72% and a +15.3% average return per recommendation. He is known in professional and personal circles as “The Renaissance Man,” because his expertise includes such varied fields as composing and performing music; Western horsemanship, combat marksmanship, martial arts, auto racing and bodybuilding. Jim holds a BA in philosophy from the University of California, Los Angeles, and is a former U.S. Army paratrooper. A self-described “radical for capitalism,” he celebrates the virtue of making money from his Southern California horse ranch.