Home etftrends.com Inflation Concern Sparks Real Asset Rally

Inflation Concern Sparks Real Asset Rally

By David Schassler, Portfolio Manager and Head of Portfolio and Quantitative Investment Solutions, VanEck

The VanEck Vectors® Real Asset Allocation ETF (RAAX®) uses a data-driven, rules-based process that leverages over 50 indicators (technical, macroeconomic and fundamental, commodity price, and sentiment) to allocate across 12 individual real asset segments in five broad real asset sectors. These objective indicators identify the segments with positive expected returns. Then, using correlation and volatility, an optimization process determines the weight to these segments with the goal of creating a portfolio with maximum diversification while reducing risk. The expanded PDF version of this commentary can be downloaded here.

Overview

The VanEck Vectors® Real Asset Allocation ETF (“RAAX”) and real assets broadly both finished the year on a positive note. RAAX returned +0.44% versus +4.97% for the Bloomberg Commodity Index and +4.82 for the Blended Real Asset Index. However, the total return for RAAX with the yearend distribution included was +6.53%, outperforming both indices during the month.[1]

The rally in real assets continued into December as investors continued to weigh the near-term risks of inflation. RAAX has been a huge beneficiary of this change in sentiment because of the ability of real assets to hedge against inflation. Regardless of where you stand on the “great inflation debate”, it seems unwise to ignore this risk and fail to position your portfolio accordingly.

1 MoYTD1 YrLife
(04/09/18)
RAAX (NAV)0.44-13.73-13.73-3.50
RAAX (Share Price)0.18-13.72-13.72-3.51
Bloomberg Commodity Index*4.97-3.12-3.12-2.86
Blended Real Asset Index*4.821.881.883.26
1 MoYTD1 YrLife
(04/09/18)
RAAX (NAV)-5.08-21.67-18.32-7.53
RAAX (Share Price)-5.00-21.62-18.36-7.51
Bloomberg Commodity Index*-3.35-12.08-8.20-6.85
Blended Real Asset Index*-3.57-14.00-9.28-3.26


The table presents past performance which is no guarantee of future results and which may be lower or higher than current performance. Returns reflect temporary contractual fee waivers and/or expense reim­bursements. Had the ETF incurred all expenses and fees, investment re­turns would have been reduced. Investment returns and ETF share values will fluctuate so that investors’ shares, when redeemed, may be worth more or less than their original cost.

1Source:  Bloomberg. Please note that the returns include the distribution on the ex-date of December 29, 2020 but not the potential reinvestment that occurred on January 5, 2021.  Had the returns above included reinvested distributions, the returns would have been higher.  Please visit our website at https://www.vaneck.com/resources/tax-and-distributions/etfs/ for additional information.

Returns less than a year are not annualized.

Expenses: Gross 1.13%; Net 0.75%. Expenses are capped contractually at 0.55% through February 1, 2021. Expenses are based on estimated amounts for the current fiscal year. Cap exclude certain expenses, such as interest, acquired fund fees and expenses, and trading expenses.

The chart below illustrates the U.S. M2 money supply, in billions of dollars. As you can see, the money supply has increased by 25% since the start of the pandemic!

More Money + Increase in Economic Activity + Larger Deficits = Near-Term Inflation Risk

U.S. M2 Money Supply (as of December 31, 2020)

More Money + Increase in Economic Activity + Larger Deficits = Near-Term Inflation Risk U.S. M2 Money Supply (as of December 31, 2020)

More Money + Increase in Economic Activity + Larger Deficits = Near-Term Inflation Risk U.S. M2 Money Supply (as of December 31, 2020)

Data as of December 31, 2020. Source: Bloomberg.

Way more money in the system plus the potential for an increase in economic activity post-COVID-19 plus much larger government deficits equals a real risk of near-term inflation. This risk increases even further given the Fed’s new position of allowing inflation to rise moderately above its 2% target, if needed, to support the economy.

Let’s now take a look at the performance of RAAX in December. Every real asset within RAAX posted a strong monthly return, but there were some clear standouts. As illustrated below, these top performing real assets included diversified metals, oil services equities and low-carbon energy.

Real Asset Monthly Performance (December 2020)

Real Asset Monthly Performance (December 2020)

Real Asset Monthly Performance (December 2020)

Data as of December 31, 2020. Source: Bloomberg. Past performance does not guarantee future results.

The chart below demonstrates the current, previous months and recent shifts in RAAX’s asset allocation. The recent shifts include reductions in exposure to diversified commodities, base metal equities and oil related equities, and increases in exposure to REITs and low carbon energy.

Monthly Sector Exposures

Monthly Sector Exposures

Monthly Sector Exposures

The chart below shows the real asset risk composite, which is used to measure the overall risk regime in real assets. A score of 0 represents the lowest risk level and a score of 100 represents the highest risk level. A score of 60 or higher will result in our most defensive posture. The current score is 17, which indicates a stable risk regime for real assets.

Overall Risk Score

Overall Risk Score

Overall Risk Score

Real Asset Sector Allocations Since Inception

Real Asset Sector Allocations Since Inception

Real Asset Sector Allocations Since Inception

Real Asset Class Allocations

Jan-21Dec-20Change from Previous Month
REITs13.6%5.0%8.6%Increase
Agribusiness Equities6.8%3.8%3.0%Increase
Low Carbon Energy Equities6.8%5.0%1.8%Increase
Gold Bullion20.8%20.1%0.7%Increase
Gold Equities5.4%5.0%0.3%Increase
Oil Services Equities3.3%3.0%0.3%Increase
MLPs5.1%5.0%0.2%Increase
Unconventional Oil & Gas Equities3.1%2.9%0.2%Increase
Cash0.0%0.0%0.0%No Change
Global Infrastructure5.0%5.0%0.0%No Change
Energy Equities4.8%5.0%-0.1%Decrease
Steel Equities2.7%3.7%-1.1%Decrease
Global Metals & Mining Equities2.6%3.8%-1.1%Decrease
Coal Equities0.0%3.8%-3.8%Decrease
Diversified Commodities20.1%29.1%-9.0%Decrease

Originally published by VanEck, 1/21/21

DISCLOSURES

Please note that the information herein represents the opinion of the author, but not necessarily those of VanEck, and these opinions may change at any time and from time to time. Non-VanEck proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Historical performance is not indicative of future results. Current data may differ from data quoted. Any graphs shown herein are for illustrative purposes only. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.

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