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PowerShares launches Variable Rate Investment Grade Portfolio


Invesco PowerShares Capital Management has launched the PowerShares Variable Rate Investment Grade Portfolio (VRIG), an exchange-traded fund (ETF) that will be actively managed by IFI. 

With global interest rates at historical lows due to fiscal stimulus, VRIG offers investors a fixed income alternative that may benefit from rising short term rates.
Rather than trying to time when interest rates may rise, the ETF seeks to be defensively positioned for higher short term rates, providing investors with the opportunity for current income.
"With structural money market reform coming in October, we are pleased to be adding VRIG to our ETF line-up of variable rate products, says Dan Draper, global head of PowerShares. “Companies across the US.have not experienced real rate increases for years, but with Libor rising they may have to pay higher rates on their loans while new money market rules could also slow demand for short-term debt."
The addition of VRIG expands PowerShares industry leadership position with more than USD6 billion in assets under management (AUM) in floating and variable rate ETFs.
VRIG will focus on investment grade assets with ample liquidity across a broad spectrum of asset classes. Broadly, the ETF will focus investments in floating rate US Treasuries, government sponsored agency mortgage-backed securities, US Agency debt, structured securities and floating rate investment grade corporates.
"IFI's investment process has many potential benefits which are derived from our proprietary credit research that incorporates loan, property and borrower-level analytics as well as continuous risk management," says Tony Semak, senior client portfolio manager at Invesco. "We are pleased to be collaborating with PowerShares to bring this unique product offering to the market."
The ETF will not use leverage, nor will it employ derivative positions. The IFI team has a long history in Agency MBS, Non-Agency MBS, ABS, CMBS and corporate bonds. In addition, the investment team has been involved with ABS, CMBS and RMBS since the early years of those markets.
The investment team's process, rooted in quantitative research, offers a comprehensive approach to credit analytics and continuous risk management. The investment team within IFI manages a mortgage REIT, which was the first blind pool financials IPO post-financial crisis. Additionally, the team was chosen by the US Treasury Department to participate in the Public Private Investment Program (PPIP) in 2009. PPIP was a plan designed to value and remove troubled assets from the balance sheet of troubled financial institutions in the US.
VRIG will primarily invest in variable and floating rate investments, which have coupons that adjust with short term interest rates. Should short term rates increase, the variable rate coupons are designed to adjust upward and produce a higher yield. Conversely, should short rates decrease, the yield of variable rate securities will be lower. Additionally, as the result of their significantly lower durations relative to fixed rate bonds, prices of variable and floating rate bonds have generally fared better in rising rate environments.
VRIG also has the ability to predominantly invest in flight-to-quality assets such as US Treasuries and other government debt should the residential or commercial credit cycle turn or global market liquidity become impaired.

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