As investors look to the possibility of rising inflation ahead, they should consider the role of real assets and related exchange traded fund strategies to hedge the potential risks in this cycle.
In the recent webcast, Inflation is Here. Time to Get Real with Real Assets, David Schassler, Portfolio Manager and Head of Quantitative Investment Solutions Group, VanEck, warned that inflation is already here and investors should not assume the recent increases in consumer prices will be transitory.
Fueling the spike in inflation and the forward outlook, the Federal Reserve has drastically increased the U.S. money supply through aggressive accommodative measures to support the coronavirus-stricken economy. Meanwhile, the U.S. Federal Reserve balance sheets as a percentage of U.S. GDP have surged and the U.S. dollar has weakened in recent months.
Rising prices are an ongoing trend across the board. For example, Schassler pointed out that wage growth experience a sudden jump in late 2020. Home prices have surged. Energy consumption is also growing faster than production, adding to rising costs.
The ongoing energy transition toward combating climate change has contributed to structural changes and shifts in raw materials inputs. Specifically, electric vehicles require substantial amounts of basic minerals like graphite, copper, and nickel. Copper and zinc are main components of offshore and onshore wind turbines. Copper is also a major component of solar PV, nuclear, coal, and natural gas technologies.
Schassler argued that as inflationary risks rise, investors should consider the benefits of real assets. Specifically, from 1969 through 1981, commodities and gold have outperformed equities and fixed income assets over a 12 month real return when CPI levels were at or about 4% to 10%. In the mid 2000s when inflation ranged from 1% to 4%, natural resources, infrastructure, REITs, and gold outperformed equities and fixed income assets as well. So far in 2021, natural resources, commodities and REITs have generated double-digit returns.
Despite the recent outperformance in commodities, Schassler believes that the asset class may still have more room to run. He pointed out that commodities and other real assets have massively underperformed the S&P 500 Index since the financial crisis. Moreover, commodity prices remain historically cheap as compared to the S&P 500 Index.
Schassler even noted that Bitcoin may act as a form of digital gold, which could expand the universe of known real assets to help investors better-diversify inflation risks ahead.
To help investors gain exposure to real assets, the VanEck Inflation Allocation ETF (RAAX) is an actively managed fund of funds that seeks to maximize long-term real returns. It invests in ETPs with exposure to real assets, such as real estate, commodities, natural resources, or infrastructure, and may hold up to 100% cash or equivalents.
Specifically, RAAX can include financial assets like gold bullion, gold mining equities, and Bitcoin. The ETF can hold exposure to resource assets through diversified commodities, low carbon energy equities, global metals & mining equities, steel equities, unconventional oil & gas equities, oil services, energy stocks, and agribusinesses. Lastly, the strategy can include income assets like MLPs, infrastructure stocks, and REITs.
Financial advisors interested in learning more about real assets can watch the webcast here on demand.