Red-hot inflation reading (due to COVID-19-and-war-induced supply chain issues) has been hitting headlines across the developed markets lately. The global market is now severely worried about stagflation.
Stagflation arises when high inflation hits the economy and the age-old policy treatment of inflationary pressure – hiking interest rates – goes against economic growth. In short, higher inflation combined with falling growth results in stagflation.
The annual inflation rate in the United States accelerated to 8.5% in March 2022, the highest since December of 1981 from 7.9% in February and compared with market forecasts of 8.4%. To tame it, the Federal Reserve enacted the biggest interest rate hike (worth 50 basis points) in 22 years in May followed by a 25-bp rate hike in March. The Fed has hinted at further rate hikes this year.
With higher rates, banks will make it pricier for households, businesses and governments to borrow. This in turn will lower demand for goods and services, will cut activities in the economy and help ease price inflation, but lowers GDP growth too.
No wonder, many analysts are forecasting an U.S. recession this year as the economy is still striving hard to recover from the pandemic. Notably, the American economy contracted an annualized 1.4% on quarter in Q1 of 2022, well below market forecasts of a 1.1% expansion and following 6.9% growth in Q4 of 2021.
Against this backdrop, Merk Investments has launched an ETF that could be an useful tool to fight stagflation.
The Merk Stagflation ETF (STGF) looks to track the price and yield performance of the Solactive Stagflation Index (SOLSTAGF), which seeks to follow the performance of components that are expected to benefit, either directly or indirectly, from persistent inflation, including in an environment of weak economic growth (stagflation).
The fund’s key holdings are
Schwab U.S. TIPS ETF ( SCHP Quick Quote SCHP - Free Report) (64.47%), Invesco DB Oil Fund ( DBO Quick Quote DBO - Free Report) (13.8%), Vaneck Merk Gold Shares OUNZ (11.38%), Vanguard Real Estate ETF VNQ (10.28%) and U.S. Dollar (0.05%). How Does It Fit In a Portfolio?
“The Merk Stagflation ETF is designed to provide appreciation potential and inflation-sensitive income in an environment of stagflation like that of the 1970s—characterized by high inflation rates, a bull market in commodities, and rising real estate prices. The strategy holds a basket of exposures across three asset classes: inflation-protected bonds, commodities, and real estate,” said Axel Merk, president and chief investment officer of Merk Investments, in a news release announcing the fund’s launch,
as quoted on etfdb.com. In a nutshell, the strategy is built on the methodology that has seen success in 1970s. Can it See Success?
Though the fund is touted as the first stagflation-themed ETF in the market, its inflation-beating objective is not extremely unique. First of all, the fund is heavy on TIPS – the age-old tool to fight inflation.
Secondly, there are multi-asset products with a view to beat inflation, namely
Amplify Inflation Fighter ETF ( IWIN Quick Quote IWIN - Free Report) . It hit the market in early February. It has exposure to categories like commodity REITs, homebuilders, miners, commodities & futures, interest rate hedge, real estate tech and cash. Harbor All-Weather Inflation Focus ETF ( HGER Quick Quote HGER - Free Report) – launched in February – follows the Quantix Inflation Index, which is composed of futures contracts on physical commodities and it considers relative inflation sensitivity of a commodity and the relative cost of holding a rolling futures position in the commodity. The index has exposure to oil, gold, silver and some other metals and agricultural commodities.
Still, STGF appears to be a nice product as it combines TIPS, gold, oil and real estate into one product. The product should see success at the current level as oil prices are soaring thanks to the Russia-Ukraine war. Global recessionary fear should back the safe-haven metal gold. Real estates are also viewed as a good inflation-beating product.