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

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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, -1.29%, 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, +1.82% 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.

“Our biggest contributor to performance has been exposure to oil CL00, +2.24% 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, -1.97%, 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, -2.16%, Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF PDBC, +0.85%, iShares Global Energy ETF IXC, -4.99%, iShares Short Treasury Bond ETF SHV, +0.01% and FlexShares Global Upstream Natural Resources Index Fund GUNR, -3.21%, 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, -3.49% has dropped around 20% this year through Wednesday, while the iShares Core U.S. Aggregate Bond ETF AGG, -0.18% 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, -3.36% 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, -3.16%, 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…

…the bad

Weekly ETF reads: