VRIG: There Are Better Alternatives

seekingalpha08-23

Invesco Variable Rate Investment Grade ETF provides exposure to floating rate investment grade credit securities.VRIG ETF has delivered modest returns since October, outperforming expectations due to ...

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}\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nVRIG: There Are Better Alternatives\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-08-23 11:23 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4716626-vrig-there-are-better-alternatives-variable-rate-investment-grade-etf><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Invesco Variable Rate Investment Grade ETF provides exposure to floating rate investment grade credit securities.VRIG ETF has delivered modest returns since October, outperforming expectations due to ...</p>\n\n<a href=\"https://seekingalpha.com/article/4716626-vrig-there-are-better-alternatives-variable-rate-investment-grade-etf\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"FDN","symbol_name":"First Trust Dow Jones Internet I","start_time":0,"source_url":"https://seekingalpha.com/article/4716626-vrig-there-are-better-alternatives-variable-rate-investment-grade-etf","article_id":"2461581917","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/200433919/image_200433919.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2461581917","pubTimestamp":1724383429,"columns":[],"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Invesco Variable Rate Investment Grade ETF provides exposure to floating rate investment grade credit securities.VRIG ETF has delivered modest returns since October, outperforming expectations due to ","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"FDN":"First Trust Dow Jones Internet I","VRIG":"Invesco Variable Rate Investment Grade ETF","BKLN":"Invesco Senior Loan ETF","JAAA":"Janus Henderson AAA CLO ETF","BK4585":"ETF&股票定投概念","SGOV":"iShares 0-3 Month Treasury Bond ETF","BK4588":"碎股","BK4550":"红杉资本持仓"},"translate_title":"VRIG：还有更好的选择","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"VRIG":1,"BKLN":1,"JAAA":1,"SGOV":1,"US2Y.BOND":0.9,"US7Y.BOND":0.9,"US6M.BOND":0.9,"US5Y.BOND":0.9,"US3Y.BOND":0.9,"US30Y.BOND":0.9,"US12M.BOND":0.9,"US10Y.BOND":0.9,"FDN":0.9,"US912797GL51.BOND":0.6,"US912797GW17.BOND":0.6,"US912797HE00.BOND":0.6},"content_text":"Invesco Variable Rate Investment Grade ETF provides exposure to floating rate investment grade credit securities.VRIG ETF has delivered modest returns since October, outperforming expectations due to the U.S. economy's solid growth.However, a comparison against peers shows VRIG has underperformed, with higher credit risk, but lower returns compared to JAAA.With the economy slowing down, JAAA ETF may be a better investment option due to its superior distribution yield and portfolio credit quality.   John Lund/DigitalVision via Getty Images In October, I wrote a cautious article on the Invesco Variable Rate Investment Grade ETF (NASDAQ:VRIG). My main concern was the lagged effects of the Federal Reserve's rate increases, causing an economic slowdown and worsening credit markets. I also thought there were superior alternative funds that could provide similar floating-rate, high-quality credit exposures to investors. So far, the U.S. economy has defied naysayers like myself, growing at 2-3% in the past few quarters (Figure 1).   Figure 1 - U.S. GDP has continued to grow solidly (U.S. Bureau of Economic Analysis) This has allowed the VRIG ETF to deliver modest performance, returning over 6% in total returns since October (Figure 2).   Figure 2 - VRIG has returned 6% since October (Seeking Alpha) Although my call has been incorrect about the economy, I believe my opinion that VRIG underperforms similar funds continues to hold true. Looking at historical returns and portfolio composition, the VRIG ETF has more credit risk, but lower returns than peer funds like the Janus Henderson AAA CLO ETF (JAAA). With unemployment rising and economic growth slowing, I believe investors should high-grade their portfolios and I believe JAAA is a superior investment compared to VRIG. Brief Fund Overview The Invesco Variable Rate Investment Grade ETF is an actively managed ETF providing investors with exposure to floating-rate investment-grade securities. Floating-rate securities, as their names suggest, pay investors interest income that varies depending on the prevailing level of short-term interest rates. The VRIG ETF charges 0.30% in management fees on $1.1 billion in assets (Figure 3).   Figure 3 - VRIG overview (invesco.com) VRIG's portfolio holds floating rate US Treasuries, government-sponsored agency mortgage-backed securities (\"MBS\"), US Agency debt securities, structured securities, and floating rate investment grade corporate securities. Figure 4 compares VRIG's asset allocation from September 30, 2023 to June 30, 2024.   Figure 4 - VRIG asset allocation, June 30, 2024 vs. September 30, 2023 (VRIG factsheets) We can see that VRIG has high-graded its portfolio, reducing Corporate Securities (38.5% to 37.8%) and Securitized Securities (37.5% to 33.6%) while increasing Treasuries (23.9% to 28.6%). This is confirmed by analyzing the credit quality allocation of the VRIG ETF (Figure 5). AAA-rated securities have been increased from 34.7% to 40.6% of the portfolio, while BBB-rated and below securities have been reduced from 19.6% to 14.2%.   Figure 5 - VRIG credit quality allocation, June 30, 2024 vs. September 30, 2023 (VRIG factsheets) Scorecard Against Peers In my prior article, I noted that investors seeking high-quality floating-rate exposures have plenty of superior alternatives. My personal favorites include the iShares 0-3 Month Treasury Bond ETF (SGOV), the Janus Henderson AAA CLO ETF (JAAA), the Janus Henderson B-BBB CLO ETF (JAAA), and the Invesco Senior Loan ETF (BKLN). These alternatives vary in their portfolio investments and how much credit risk investors are willing to bear (Figure 6).   Figure 6 - VRIG vs. floating-rate alternatives, fund overviews (Seeking Alpha) SGOV, as its name implies, owns 100% US treasury bills and is the de-facto 'risk-free' asset, with no credit or duration risk (Figure 7).   Figure 7 - SGOV's portfolio is 100% floating-rate treasury bills (ishares.com) JAAA holds a portfolio of floating-rate AAA-rated Collateralized Loan Obligations (\"CLO\"). While their name might be scary and remind investors of the Collateralized Debt Obligations (\"CDO\") that blew up the U.S. financial system during the Great Financial Crisis(\"GFC\"), CLOs have actually performed very well, with zero AAA-rated CLOs having defaulted historically, even through the GFC (Figure 8).   Figure 8 - CLO default summary by initial credit rating (S&P Global) CLOs owe their strong credit performance to the design of the product and the diversified nature of their portfolios. Unlike CDOs that can be overly concentrated in one particular sector (the CDOs that blew up in 2008 were stuffed with residential mortgage bonds and their derivatives), CLOs package together pieces of corporate loans across the economy (Figure 9).   Figure 9 - CLO overview (JAAA product brief) Furthermore, highly rated investment-grade tranches of CLOs are protected by structural enhancements such as over-collateralization and interest diversion. Interest diversion means that cashflows collected from the pool of loans are used to pay interest to the most senior tranches first (AAA downwards in the capital structure). Over-collateralization means credit losses are applied to the most junior tranches first (Equity upwards). The primary difference between JAAA and JBBB is in the credit quality of their portfolios. JAAA primarily invests in AAA-rated CLO tranches, while JBBB primarily invests in B- to BBB-rated CLO tranches (Figure 10).   Figure 10 - JAAA vs. JBBB credit quality allocation (janushenderson.com) Finally, BKLN invests in non-investment grade floating-rate senior loans, similar to the building blocks of CLOs. The credit quality allocation of BKLN's portfolio is shown in Figure 11.   Figure 11 - BKLN credit quality allocation (BKLN factsheet) Comparing VRIG against these 4 peers, based purely on VRIG's credit quality from Figure 5 above, one should expect VRIG to rank between JAAA and JBBB in terms of returns. However, when we compare historical returns, we can see that VRIG has underperformed, returning 7.0% in the past year against 5.5% for SGOV, 8.0% for JAAA, 11.7% for JBBB, and 8.9% for BKLN (Figure 12).   Figure 12 - VRIG vs. peers, 1-year returns (Seeking Alpha) The same analysis holds true even if we stretch the look back period to January 12, 2022, the inception date of the JBBB ETF (Figure 13). VRIG has delivered 13.2% total returns compared to 10.5% for SGOV, 14.3% for JAAA, 16.1% for JBBB, and 14.2% for BKLN.   Figure 13 - VRIG vs. peers, returns since January 12, 2022 (Seeking Alpha) Comparing distributions, VRIG's 6.3% trailing distribution is also inferior to JAAA's 6.4%, JBBB's 7.7%, and BKLN's 8.7% (Figure 14).   Figure 14 - VRIG vs. peers, distribution yields (Seeking Alpha) So VRIG has more credit risk, but lower returns and yield compared to JAAA. I have written exclusive articles on the various alternative funds here (\"SGOV\"), here (\"JAAA\"), here (\"JBBB\"), and here (\"BKLN\"). JAAA Is My Go-To Floating-Rate Investment For The Current Environment In my opinion, with the July Employment report triggering the infamous 'Sahm Rule recession indicator (the Sahm Rule indicator says that a recession has started when the three-month moving average of the unemployment rate rises by half a percentage point from the cycle low), investors should look for ways to high-grade their investment portfolios (Figure 15).   Figure 15 - Sahm Rule triggered in July (St. Louis Fed) While the recent rise in unemployment may seem benign at first glance, rising from the ultra-low 3.4% in April 2023 to 4.3% in July 2024, the issue is that all increases in unemployment look benign at the beginning of recessions (Figure 16). Once unemployment starts heading in the wrong direction, it tends to snowball. The average peak in unemployment during recessions is 3 percentage points higher than at the start of the recession.   Figure 16 - Unemployment rate tends to snowball during recessions (BLS via Claudia Sahm's substack) Regardless of whether we actually experience a National Bureau of Economic Researcheven (\"NBER\") classified recession or not in the coming months, I believe an economic slowdown is occurring as we speak. For example, the recently released S&P Global U.S. Manufacturing Flash PMI showed a marked deterioration from 49.6 to 48.0 in August (Figure 17).   Figure 17 - US manufacturing contracted in July (S&P Global) Any sub-50 figure signals a deterioration in business conditions, and August was the steepest rate of deterioration since December: (Author highlighted important sentences) All five components of the PMI weakened in August. Increased rates of decline for new orders and inventories were accompanied by the first fall in factory production for seven months. Employment growth meanwhile slowed to near-stagnation. Suppliers’ delivery times also shortened to the greatest extent since February, in a sign of suppliers being less busy amid weaker demand for raw materials: input buying by factories fell at the sharpest rate for eight months. However, inventories of finished goods rose markedly for the third time in the past four months, the recent accumulation on unfinished inventory having been amongst the largest recorded in the history of the survey, often reflecting weaker than expected sales. Slowing order-books and unsold inventory is usually a recipe for economic slowdowns. In this environment, I believe investors' safest bet may be to high-grade their portfolio's exposure with the JAAA ETF. I believe JAAA's portfolio of AAA-rated CLO tranches provides a balance of superior yield compared to treasuries (JAAA is yielding 6.4% compared to SGOV's 5.2%) and safety (historically, AAA-rated CLO tranches have not experienced any defaults). Conclusion The Invesco Variable Rate Investment Grade ETF provides exposure to floating-rate investment-grade securities. The VRIG ETF has delivered modest returns since October, as the U.S. economy has continued to grow at a solid pace.  However, with the economy slowing down, I believe investors' best bet may be with the JAAA ETF, as it provides a balance between superior distribution yield and portfolio credit quality. Historically, JAAA has outperformed VRIG with both higher total returns and a higher distribution yield.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2461581917"}