Real assets can still thrive as the Fed battles inflation: It’s hard to put the ‘inflation genie’ back in the bottle, says this ETF portfolio manager

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Hi! In this week’s ETF Wrap, I spoke with VanEck portfolio manager David Schassler about soaring inflation and the role of real assets in a challenging environment for stocks and bonds. He also explained why the VanEck Inflation Allocation ETF no longer holds bitcoin.

Additionally, I caught up with Meb Faber, Chief Investment Officer of Cambria Investment Management, about what’s behind his Global Momentum ETF’s gains this year.

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According to David Schassler, portfolio manager and head of quantitative investment solutions at VanEck, the Federal Reserve has become more aggressive in fighting inflation, but real assets should still benefit as the rising cost of living will remain. probably high even if it eventually moderates. .

The Fed has been far behind the inflation-control curve and now wants to show it takes the problem “seriously,” Schassler said by phone. “They’re trying to catch up.”

The central bank raised its benchmark interest rate by 75 basis points on Wednesday, the biggest rate hike since 1994 in a bid to bring inflation under control. This aggressive move comes against a backdrop of slowing US growth.

“When the inflationary genie is completely out of the bottle, which it clearly is right now, it’s very difficult to put it back in,” Schassler said. “We would expect a hard landing.”

Schassler is the portfolio manager of the VanEck Inflation Allocation ETF RAAX,
-1.44%,
an actively managed fund diversified among real assets. The ETF has gained about 6.5% this year through Wednesday, while stocks and bonds have suffered losses, according to FactSet data.

“During periods of high inflation, historically, real assets thrive while traditional assets suffer,” Schassler said.

VanEck’s inflation allocation ETF has broad exposure to natural resource assets, including commodities and stocks such as energy stocks, he said. The ETF is also invested in GC00 gold bars,
+0.17%
and gold miner stocks, as well as income-generating real estate assets such as infrastructure companies, real estate investment trusts and master limited partnerships, according to Schassler.

“What the 1970s tell us is that in a period of high inflation with declining economic activity, real assets have the potential to significantly outperform,” he said. This is captured in a chart Schassler highlighted in his blog on Wednesday.

JUNE 15, 2022 VANECK BLOG


“Our biggest contributor to performance was exposure to oil CL00,
+0.87%
and companies in the oil sector,” he said. “We believe oil prices will remain high for an extended period,” helping companies in the sector potentially “materially outperform.”

Trend tracking

Natural resources propelled gains this year in the Cambria Global Momentum ETF GMOM,
-1.81%,
a trend-tracking fund that invests in ETFs, according to Meb Faber, Chief Investment Officer of Cambria Investment Management.

Shares of the fund are up 5.3% this year through Wednesday, according to FactSet. The ETF posted a total return of 6.3% over the same period, according to data from FactSet.

While the fund has been concentrated in natural resources, what it avoids is also important, “that is, a lot of traditional assets that have been hit quite hard,” Faber said in an interview. The Cambria Global Momentum ETF looks at major global assets, investing in the top third based on momentum or relative strength, but only if they are above their long-term trend, he said.

The fund’s top five holdings as of June 15 included the Cambria Value and Momentum ETF VAMO,
-2.19%,
Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF PDBC,
+0.55%,
iShares Global Energy ETF IXC,
-5.14%,
iShares Short Treasury Bond ETF SHV,

and FlexShares Global Upstream Natural Resources Index Fund GUNR,
-3.15%,
according to the Cambria website.

The Invesco Optimum Yield Diversified Commodity Strategy ETF No K-1 has gained about 42% this year through Wednesday, according to FactSet data. The fund was up about 0.9% on Thursday afternoon as the stock market sold off strongly, with the S&P 500 down 3.9%, the data showed, at last check.

While many people assume that commodity prices will go down, Faber said “that’s probably a dangerous assumption.”

VanEck encourages investors to have an allocation of around 15% to real assets to offset losses elsewhere in a high inflation environment, according to Schassler.

See: Rising rents, gas and food prices push U.S. inflation to 8.6%, its highest level in 40 years, CPI shows

Traditional assets struggled in 2022 amid the highest inflation in four decades. The S&P 500 SPX index,
-3.25%
fell around 20% this year through Wednesday, while the iShares Core US Aggregate Bond ETF AGG,
+0.24%
lost 11.5% on a total return basis, according to FactSet data.

“We don’t see inflation coming back down to the Fed’s 2% target anytime soon,” Schassler said. He expects it to moderate to a 3% to 5% range as the Fed cools the economy with rate hikes, which have no “immediate impact”.

Bitcoin Exit

BitcoinBTCUSD,
+1.84%
is no longer held by the VanEck Inflation Allocation ETF and the fund has no plans to invest in cryptocurrency again, according to Schassler.

He said the ETF exited bitcoin “fairly recently” when the price was above $30,000. As of Thursday afternoon, bitcoin was trading down 3.1% at $21,015.

“While we believe in digital assets, we are not going to be exposed in this vehicle because the idea of ​​digital assets in general is a hot topic and not everyone shares the same opinions about it,” Schassler said. .

Investors looking to invest in bitcoin could combine that exposure with the company’s inflation allocation fund, he said, adding that the VanEck Inflation Allocation ETF was created before the company’s bitcoin fund.

VanEck XBTF Bitcoin Strategy ETF,
-3.76%,
which launched in November, was trading down 3.2% on Thursday afternoon, according to FactSet data, when last checked.

Lily: ProShares Bitcoin Strategy ETF Tanks as Crypto Rout Deepens

As usual, here’s your rundown of the best and worst performing ETFs from the past week through Wednesday, according to data from FactSet.

Good…
Best performers %Performance

Xtrackers Harvest CSI 300 China A-Shares ETF ASHR,
-1.90%

4.6

KraneShares Bosera MSCI China A 50 Connect Index ETF KBA,
-1.94%

4.4

iShares MSCI China A ETF CNYA,
-1.70%

4.1

WisdomTree China ex-State-owned Enterprises Fund CXSE,
-3.37%

1.7

Invesco China Technology ETF CQQQ,
-3.71%

1.3

Source: FactSet data through Wednesday June 15, excluding ETNs and leveraged products. Includes ETFs traded on the NYSE, Nasdaq and Cboe of $500 million or more.

…the bad
The worst performers %Performance

ProShares Bitcoin ETF Strategy BITO,
-3.58%

-27.9

United States Natural Gas Fund LP UNG,
-0.71%

-16.2

VanEck Oil Services ETF OIH,
-5.50%

-13.4

Sprott Uranium Miners ETF URNM,
-4.62%

-13.3

iShares Mortgage Real Estate ETF REM,
-5.81%

-13.3

Source: FactSet

The weekly ETF reads as follows:

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