VRIG - VRIG: Simple Has Worked In 2023

2023-06-27 04:39:41 ET

Summary

• Invesco Variable Rate Investment Grade ETF offers annualized yields of 6% with low market and credit risk.
• The fund contains only investment-grade bonds and has a short duration, benefiting from higher rates through an increased dividend yield.
• The fund has a high Sharpe ratio and low volatility, with only a 1% drawdown in 2023.

Thesis

The Invesco Variable Rate Investment Grade ETF ( VRIG ) is an exchange traded fund. As its name suggests, VRIG's collateral is all investment grade and based on a floating rate, thus reducing both market risk (low duration) and credit risk (high credit ratings). The fund falls in the same category as a couple of other names we have covered in the past:

• the VanEck IG Floating Rate ETF ( FLTR ) covered here
• the iShares Floating Rate Bond ETF ( FLOT ) covered here

Unless you were an uber-equity bull, simple has been the proper answer in 2023. They used to say cash is trash, and that 'there is no alternative' (TINA). Nowadays instruments like VRIG give you annualized yields of 6% (treasuries + 100 bps) with few headaches:

Funds which let you sleep at night usually have total return graphs exposing nice upwards sloping lines. We can see the maximum drawdown here for VRIG was 1% during the March/April regional banking crisis. Going through the collateral, the fund does contain a couple of regional banks, but they are not the names that have been in the news (the fund has exposure to 'Huntington National Bank' and 'M&T Bank Corp' for example). To mitigate credit risk, the fund is extremely granular, with the majority of the names representing less than 0.6% of the fund. Following the Fed actions that set up a new facility to support held to maturity assets at regional banks we are less concerned about this risk, especially in light of the collateral review.

The fund contains only investment grade names, which makes it less susceptible to any credit cycle turn. In reality what we have seen is that only banks have the propensity to go from investment grade to defaulted in a matter of weeks, whereas industrials take years to decay in terms of balance sheet, income metrics and profitability. Credit risk is not a concern here either.

Given its floating rate collateral, the fund has a very short duration, and furthermore has been able to take advantage of higher rates via a higher dividend yield. If rates stay here for the entire 2023, we will see total returns for this fund in excess of 6%.

Analytics

• AUM: $0.58 billion
• Sharpe Ratio: 0.94 (3Y)
• Std. Deviation: 1.5 (3Y)
• Yield: 6%
• Premium/Discount to NAV: n/a
• Z-Stat: n/a
• Leverage Ratio: 0%
• Composition: Fixed Income - Short term IG Bonds / ABS
• Duration: 0.07 yrs
• Expense Ratio: 0.3%

Collateral/Holdings

The fund contains only investment grade bonds:

The small 'BB' bucket above references one or two credits which are what they call 'fallen angels':

A fallen angel is a bond that was once rated as investment grade but has since been downgraded to junk bond status. The downgrade is caused by a deterioration in the financial condition of the issuer.

The collateral pool is almost evenly split between corporate bonds and securitizations after we factor out Treasuries:

Please keep in mind that the securitizations held are either Agency MBS securitizations or senior, investment grade rated non-agency securitizations. There is little in terms of credit risk here.

The main concern for these short dated bond funds has been around their exposure to banks, and in particular to regional banks. Variable rate paper is not something we see very often from regionals, hence we only have a couple of names in the collateral pool here, names which actually never appeared in the news reel.

Conclusion

VRIG is a fixed income exchange traded fund. The vehicle will generally invest its net assets in a portfolio of investment-grade, variable rate instruments that are US dollar denominated and US issued. The fund is thus able to have an ultra low duration of 0.07 years and an investment grade holdings profile. This simple build now has a 30-day SEC yield of roughly 6%, and has exposed a de-minimis volatility in 2023. In reviewing the collateral we have not found any 'problem' regional banks. The fund has a large exposure of 39% to securitizations, further eroding any credit risk concerns (the held securitizations are mostly mortgage backed deals and the fund holds the senior tranche). VRIG has shown that simple can make money in 2023, with no headaches. Unless you believe we are seeing the birth of a new bull market, keep Holding this name, expecting a total return at the end of the year in excess of 6%.

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