As Investors Await Fed Rate Decision, Be Prepared with this ETF
Most people expect that interest rate increases will gradually fade away, but it is uncertain what actions the U.S. Federal Reserve will take. Therefore, it is crucial to remain flexible in the bond market.
The Federal Reserve has been grappling with persistent and problematic inflation, but the decision to pause rate increases in June might indicate that the central bank has reached a crucial juncture. Sustained hikes in interest rates could potentially trigger a recession and hinder a smooth economic transition, yet the Fed cannot afford to let escalating consumer prices spiral out of hand.
Newly released information indicates the opposite of uncontrollable inflation. In spite of this, the Federal Reserve has consistently upheld its vigilant stance; nevertheless, certain financial specialists believe it is now appropriate to shift the approach.
"It will require some time for these measures to exert their complete impact, hence considering the positive trajectory of inflation and the existence of high interest rates, my suggestion would be to adopt a patient approach and observe the forthcoming developments," stated Christopher Pissarides, a distinguished economist and recipient of the prestigious Nobel Prize. Pissarides currently serves as a professor at the globally renowned institution, the London School of Economics, as reported in an article by CNBC.
"I do not anticipate any circumstances that would prompt them to further raise interest rates, but I would certainly exercise patience on this occasion," Pissarides elaborated.
Active Management: Flexibility And Fed Rate In One ETF
If the financial markets anticipate the Federal Reserve to make a certain move, but instead, they make a different unexpected move, investors do not need to constantly readjust their investment portfolios with securities that have variable interest rates. Moreover, a strategy that involves actively managing the portfolio can enable adjustments to be made as needed. Both of these characteristics are found in the Invesco Variable Rate Investment Grade ETF (VRIG).
According to its fund description, VRIG aims to put money into US Treasuries with floating interest rates, mortgage-backed securities backed by government-sponsored agencies, US Agency debt, structured securities, and corporates that have investment-grade ratings and variable interest rates. This helps create a varied portfolio that can easily adapt to the current market conditions, regardless of whether the Federal Reserve decides to make monetary policy more restrictive or less restrictive.
The variety of investments in its fixed income portfolio also highlights its diversification. For those who are focused on earning a return, the 30-day unsubsidized yield is currently 6.06% (as of July 18th).
Most of the investment fund is made up of assets that are held for a period of one to five years, reducing the risk associated with changes in interest rates. The largest asset in the fund is United States Treasury Floating Rate Notes (as of July 18), emphasizing its emphasis on high-quality, safe investments in debt issued by the U.S. government.
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