Invesco Variable Rate Investment Grade ETF’s VRIG investment approach bears significant risks, though its repeatability improves its Process Pillar rating to Below Average from Low. This adventurous ultrashort bond strategy’s Morningstar Medalist Rating earns an upgrade to Neutral from Negative, but investors should stay mindful of its risks.
The portfolio managers implement a credit-heavy, multisector strategy, and they primarily allocate to floating-rate corporates and credit risk transfers (repackaged credit risk from agency residential mortgage-backed securities that are sold to private investors). While floating-rate securities mitigate interest-rate risk and help maintain the portfolio’s duration at less than one year, large stakes in corporates and CRTs expose the portfolio to significant credit and liquidity risks. 
Many firms approach CRTs with caution, as these securities appeared in the market only a decade ago, and being a relatively new structure, CRTs introduce uncertainty and additional risks in the portfolio. Since the ETF's inception in October 2016, the portfolio's CRT allocation has ranged between approximately 15% and 25%, while most funds in its ultrashort bond category  have no or negligible exposure. Although Invesco's fundamental research process and the depth of resources inspire some confidence in the team’s approach to CRTs, this fund won’t play the defensive role that investors usually associate with ultrashort bond offerings in a diversified portfolio. 
Invesco’s structured investments team oversee the portfolio and process. Portfolio manager and co-head of ABS Philip Armstrong runs the fund's day-to-day while securitized veterans Ken Purnell, Brian Norris, and Mario Clemente support the portfolio construction efforts at a higher level. The managers incorporate insights from the investment strategy team (a group of fixed-income leaders from across the organization) to help determine sector allocations and appropriate levels of risk. They collaborate with Invesco's global corporate credit team for fundamental research and security selection within the portfolio’s allocation to corporate credit (46% as of March 2023).
Since the ETF’s inception, its high sensitivity to credit spreads, in a broadly benign market, helped it accrue an annualized gain of 2.2% and outpace over 90% of its distinct ultrashort bond Morningstar Category peers through April 2023. However, CRT positions contribute to the ETF carrying one of the highest standard deviations within the conservative category. Investors should anticipate a choppy ride here.

Analyst Rating

Proceed with caution.

Analyst

Thomas Murphy

This approach carries excessive risk compared to peers, although the team's fundamental research approach instills some confidence. The Process Pillar is upgraded to Below Average from Low. 
The Invesco Fixed Income process, which this strategy adheres to, is structured and repeatable. The portfolio managers tap into the investment strategy team's macro views and risk budget to guide the portfolio's sector allocation. Sector teams across the fixed-income platform engage in frequent discussions about investment themes and identify risks at the industry and sector levels. Research analysts assign fundamental ratings to issuers, which play a crucial role in determining buy and sell decisions, as well as position sizing. The managers incorporate these inputs in the process and adjust the sector allocation to suit the strategy's mandate. 
The managers aim to minimize interest-rate risk and maximize income by allocating a significant portion of the portfolio to higher yielding, floating-rate securities, such as CRTs and corporates. Their bold approach produces greater levels of risk than most ultrashort bond managers who typically allocate across high-quality assets like short-term Treasuries, commercial paper, and AAA rated agency mortgages. The team will maintain these positions at modest levels and typically invest 30%-45% investment-grade corporates and 15%-25% in CRTs. The rest of the portfolio is invested across CMBS (5%-15%); U.S. Treasuries (10%-15%); and low-single-digit stakes in high-yield corporates, asset-backed securities, and agency MBS.

Below Average

Process

This large and experienced team adequately supports the investment process and risk oversight. The strategy maintains its Average People Pillar rating.
Since its inception in 2016, a group of securitized veterans has managed the offering. Portfolio manager Philip Armstrong (co-head of ABS) oversees the daily activities. Armstrong manages only this strategy, and his other responsibilities encompass ABS research and trading across the firm's fixed-income products. He brings just over a decade of experience to the table and works alongside managers Ken Purnell, Brian Norris, and Mario Clemente. The trio, with a combined 90 years of industry experience, provides high-level oversight. Clemente leads the 18-member structured investments team, which boasts an average of two decades of industry experience. Purnell runs Invesco's ABS efforts alongside Armstrong, while Norris, a senior member of the group, focuses on the MBS space. 
CRT underwriting plays a critical role in this strategy, and as such, the managers heavily rely on the three-member RMBS team to thoroughly underwrite CRT structures. The managers engage with Invesco's large global corporate credit team, leveraging analysts’ fundamental research and issuer recommendations through shared systems across groups. In addition, Invesco’s investment strategy team, consisting of sector leaders across the fixed-income platform, provides top-down insights for all multisector strategies including this ultrashort strategy.

Average

People

Invesco succeeds in a number of areas but also has its share of subpar offerings, along with many others that land somewhere in the middle. A mid-2023 change of CEO, from longtime chief Marty Flanagan to veteran Invesco executive Andrew Schlossberg, is noteworthy, and several other executives retired or departed in 2023. Portfolio-manager shuffles aimed at bolstering poor performers, which began under Flanagan, have continued under Schlossberg, who told Morningstar his most important aim is bolstering “investment quality.” However, major changes of direction or approach are unlikely. The firm retains a Morningstar Parent rating of Average. 
Invesco’s international-equity teams in Texas and New York remain solid. However, the extensive U.S.-equity lineup needs improvement. Fixed-income offerings run the gamut: The multisector and short-term-bond areas are good, but corporate high-yield is less impressive. The firm’s exchange-traded fund lineup includes the popular Nasdaq-focused QQQ; passive strategies make up around 37% of Invesco’s assets under management. Invesco has not been averse to trying new types of strategies, and it was among the firms that immediately launched a spot bitcoin ETF after SEC approval in early 2024.
The picture outside the United States is mixed. Fund performance has been subpar in Asia, and while the picture has brightened in the United Kingdom and Europe, that region still can’t be considered a strength.

Parent

Invesco Variable Rate Investment Grade ETF

VRIG is an actively-managed fund that primarily invests in USD-denominated investment-grade floating-rate securities, but can hold up to 20% in non-investment-grade securities.

VRIG's moderate and stable returns could last for longer in this elevated interest rate environment. The expectations for a quick Fed's pivot dissipated amid the acceleration in US inflation, thus increasing the attractiveness of floaters. The fund could deliver another 5% return in the following 12-month period.

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Invesco Variable Rate Investment Grade ETF offers stable income and low portfolio duration for investors concerned about an uncertain inflation outlook. VRIG primarily invests in high-grade variable rate instruments and has a current yield of 6.2%. The fund's holdings are diverse and predominantly consist of U.S. Treasury Floating Rate Notes and high-grade corporate bonds.

VRIG: For Those Expecting Higher For Longer

VRIG is an actively managed fixed income ETF that invests primarily in high-grade variable rate instruments. Despite holding collateral with longer maturities, VRIG maintains a low duration profile due to its floating-rate nature, reducing sensitivity to interest rate changes. The fund's portfolio is diversified with a focus on high-grade bonds, treasuries, and securitization sectors to mitigate credit spread risk. Single issuer concentration is kept minimal.

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