As we examine current inflation drivers, exchange traded fund investors should consider ways to adapt their allocations by using real assets, including gold, commodities, and natural resources equities.
In the recent webcast, Real Inflation Risk Requires Real Assets, David Schassler, portfolio manager and head of quantitative investment solutions at VanEck, warned that inflation is here and it is getting ugly, with the Consumer Price Index at its highest year-over-year change since 1991 and inflation sitting well above its 10-year average. He pointed out that the CPI could remain elevated as inflation broadens, especially with shelter costs, which account for about 33% of CPI, beginning to rise. Schassler also said that we are already seeing higher inflation expectations, which often lead to higher inflation through changing consumer habits.
Meanwhile, the Federal Reserve is not in a position to efficiently stave off inflation. Schassler showed that real GDP is already slowing down after the initial post-vaccination rollout bump, and the University of Michigan Consumer Sentiment Index is also slipping. Meanwhile, the U.S. will face higher debt service payments if interest rates rise, especially with U.S. Federal debt to GDP at 126%, compared to 56% back in 2000.
In this type of environment, Schassler highlighted the importance of protecting your portfolio with real assets that may enhance a traditional stock and bond mix. In the 1970s, 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.
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. Additionally, the ETF follows a risk-weighted methodology designed to create an optimally balanced portfolio and dynamically adjusts to different inflationary regimes.
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 and mining equities, steel equities, unconventional oil and gas equities, oil services, energy stocks, and agribusinesses. Lastly, the strategy can include income assets like MLPs, infrastructure stocks, and REITs.
Schassler argued that an allocation to real assets can play three key roles in a portfolio: a hedge to inflationary pressure, a leverage to global growth, and a portfolio diversifier.
“RAAX is a one-stop solution to fight inflation,” Schassler said.
Financial advisors who are interested in learning more about real assets can watch the webcast here on demand.