Real assets may still prosper as Fed fights inflation: it’s hard to get ‘inflationary genie’ back in the bottle, says this ETF portfolio manager

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 tough environment for stocks and bonds. He also explained why the VanEck Inflation Allocation ETF no longer holds bitcoin.

Plus, I caught up with Meb Faber, chief investment officer of Cambria Investment Management, about what’s behind the gains of his global momentum ETF this year.

Please send tips and feedback to christine.idzelis@marketwatch.com. You can also follow me on twitter at @cidzelis and find me on LinkedIn.

The Federal Reserve has become more aggressive fighting hot inflation, but real assets still stand to benefit as the higher cost of living will probably remain elevated even as it eventually moderates, according to David Schassler, a portfolio manager and head of quantitative investment solutions at VanEck.

The Fed has been way behind the curve taming inflation and it now wants to show that it’s taking the problem “seriously,” said Schassler by phone. “They’re attempting to play catch-up.”

The central bank raised its benchmark interest rate by 75 basis points on Wednesday, the largest rate hike since 1994 in an effort to bring inflation back under control. The aggressive move comes amid slowing U.S. growth.

“When the inflationary genie is fully outside the bottle, which it clearly is right now, it’s very hard to get it back in,” Schassler said. “We’d expect a hard landing.” 

Schassler is the portfolio manager for the VanEck Inflation Allocation ETF
RAAX,
an actively managed fund that is diversified across real assets. The ETF has gained around 6.5% this year through Wednesday, while stocks and bonds have been hit with losses, FactSet data show. 

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

VanEck’s Inflation Allocation ETF has a large exposure to natural-resources assets, including commodities and equities such as energy stocks, he said. The ETF also is invested in gold bullion
GC00
and shares of gold miners, as well as income-generating real assets such as infrastructure companies, real-estate investment trusts and master limited partnerships, according to Schassler.

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


VANECK BLOG DATED JUNE 15, 2022

“Our biggest contributor to performance has been exposure to oil
CL00
and companies in the oil sector,” he said. “We think that oil prices are going to remain elevated for an extended period of time,” helping companies in the sector to potentially “materially outperform.”

Trend following

Natural resources have propelled gains this year in the Cambria Global Momentum ETF
GMOM,
a trend-following 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, FactSet data show.

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

The fund’s top five holdings on June 15 included the Cambria Value and Momentum ETF
VAMO,
Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF
PDBC,
iShares Global Energy ETF
IXC,
iShares Short Treasury Bond ETF
SHV
and FlexShares Global Upstream Natural Resources Index Fund
GUNR,
according to Cambria’s website.

The Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF has gained about 42% this year through Wednesday, FactSet data show. The fund was up around 0.9% Thursday afternoon, while the stock market was selling off sharply, with the S&P 500 down 3.9%, the data show, at last check.

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

VanEck is encouraging investors to have a roughly 15% allocation to real assets to offset losses elsewhere amid high inflation, according to Schassler.

See: Rising rents, gas and food prices push U.S. inflation to 40-year high of 8.6%, CPI shows

Traditional assets have struggled in 2022 amid the hottest inflation in four decades. The S&P 500 index
SPX
has dropped around 20% this year through Wednesday, while the iShares Core U.S. Aggregate Bond ETF
AGG
has lost 11.5% on a total return basis, FactSet data show.

“We don’t see inflation going back down to the Fed’s 2% target anytime soon,” said Schassler. He expects it will moderate to a range of 3% to 5% as the Fed cools the economy through rate hikes, which don’t have an “immediate impact.”

Bitcoin exit

Bitcoin
BTCUSD
is no longer held by the VanEck Inflation Allocation ETF and the fund has no plans to invest in the cryptocurrency again, according to Schassler. 

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

“While we believe in digital assets, we’re not going to have exposure in this vehicle because the idea of digital assets in general is a hot topic and not everyone shares the same views on it,” said Schassler.

Investors who want to invest in bitcoin could pair that exposure with the firm’s inflation allocation fund, he said, adding that the VanEck Inflation Allocation ETF was created before the firm’s bitcoin fund.

The VanEck Bitcoin Strategy ETF
XBTF,
which was launched in November, was trading down 3.2% Thursday afternoon, FactSet data show, at last check.

Read: ProShares Bitcoin Strategy ETF tanks as crypto rout deepens

As usual, here’s your look at the top and bottom performing ETFs over the past week through Wednesday, according to FactSet data.

The good…
Best performers

%Performance

Xtrackers Harvest CSI 300 China A-Shares ETF
ASHR
4.6

KraneShares Bosera MSCI China A 50 Connect Index ETF
KBA
4.4

iShares MSCI China A ETF
CNYA
4.1

WisdomTree China ex-State-owned Enterprises Fund
CXSE
1.7

Invesco China Technology ETF
CQQQ
1.3

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

…the bad
Worst Performers

%Performance

ProShares Bitcoin Strategy ETF
BITO
-27.9

United States Natural Gas Fund LP
UNG
-16.2

VanEck Oil Services ETF
OIH
-13.4

Sprott Uranium Miners ETF
URNM
-13.3

iShares Mortgage Real Estate ETF
REM
-13.3

Source: FactSet

Weekly ETF reads:

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