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It’s Shocking: Inflation’s Impact on Asset Allocation

·8 min read

This article was originally published on ETFTrends.com.

By David Schassler
Head of Quantitative Investment Solutions

Investors need to think beyond the 60/40 portfolio in periods of high inflation. Historically, real assets have provided diversification to help manage the impact of inflation.

“Statement Shock” Is Setting In

Statement shock is the deeply unsettling feeling that overwhelms investors when they realize that their 60/40 portfolio is down 11% year-to-date. They take a deep breath and realize that, actually, they have been here before. The 60/40 portfolio was down by this much, or more, in the dotcom crash, the global financial crisis (GFC) and the COVID-19 crash.

After further analysis, the investors realize that the problem is likely much worse than they first thought. They are actually down close to 15% year-to-date in real terms, given the high rate of inflation. U.S. inflation, as measured by the Consumer Price Index (“CPI”), is now 8.6% year-over-year and 4.9% year-to-date. The latest inflation report, up 1% month-over-month, was yet another black eye on the face of those that have been calling for “peak inflation” for over a year now. Then, the most concerning aspect of this “correction” sets in. This time actually is different. In those past corrections, the losses were the result of large losses from their 60% exposure to stocks. U.S. equities, as measured by the S&P 500 Index, were down around approximately 40% during the dotcom crash, 50% during the GFC and 30% during the COVID-19 crash. Yet, bond prices were relatively stable and proved to be an excellent hedge. This time, stocks and bonds are down together.

The 60/40 portfolio may not be a good investment solution during a period of high inflation. High inflation erodes corporate profit margins and leads to higher interest rates and overall financial instability. As such, stocks and bonds have historically not performed well during periods of high inflation, which means that investors need to think beyond what has worked during periods of low inflation.

During periods of high inflation, commodities and other real assets have historically provided the much needed diversification. The charts below demonstrate the diversification benefits of commodities during the Great Inflation of the 1970s and the mild bout of inflation in the mid-2000s:

Rolling 3-Month Real Returns During Negative Periods for the S&P 500 Index – December 1969 to December 1979

Rolling 3-Month Real Returns During Negative Periods for the S and P 500 Index - December 1969 to December 1979
Rolling 3-Month Real Returns During Negative Periods for the S and P 500 Index - December 1969 to December 1979

Source: Bloomberg.

Rolling 3-Month Real Returns During Negative Periods for the S&P 500 Index – June 2005 to June 2007

Rolling 3-Month Real Returns During Negative Periods for the S and P 500 Index - June 2005 to June 2007
Rolling 3-Month Real Returns During Negative Periods for the S and P 500 Index - June 2005 to June 2007

Source: Bloomberg.

History appears to be repeating itself. Stocks and bonds are falling and commodity prices are rising:

Rolling 3-Month Real Returns During Negative Periods for the S&P 500 Index – May 2021 to May 2022

Rolling 3-Month Real Returns During Negative Periods for the S and P 500 Index - May 2021 to May 2022
Rolling 3-Month Real Returns During Negative Periods for the S and P 500 Index - May 2021 to May 2022

Source: Bloomberg.

Wake Up and Buy Real Assets!

Commodities are just one way to play high inflation. We strongly prefer a diversified basket of real assets that offers significant inflation protection, with the potential to provide a more stable risk and return profile.

The VanEck Inflation Allocation ETF (RAAX) is materially outperforming stocks and bonds throughout this inflation cycle:

  • On a cumulative return basis, RAAX is outperforming the S&P 500 Index by nearly 25% year-to-date, 16.5% over the past one-year and 25% over the past two years (or nearly 10% on an annualized basis).*

  • RAAX is outperforming the Bloomberg Barclays U.S. Aggregate Bond Index by 21% year-to-date, 24% over the past one-year and 75% over the past two years.

We have been educating investors on how to invest during high inflation for a long time now. Real assets have, historically, been the top performing asset class during periods of high inflation. Yet, many investors have very little to no exposure.

We had over a decade of abnormally low inflation, low interest rates and slow economic growth. We believe this was a great environment for growth stocks and bonds, but a terrible environment for many real assets. The tables have now turned. We expect real assets to continue to outperform based on our view that inflation will remain elevated for an extended period of time.

Originally published by VanEck on June 15, 2022. 

For more news, information, and strategy, visit the Beyond Basic Beta Channel.

Important Disclosures 

* For full standardized fund performance, please visit RAAX’s performance webpage.

This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Information provided by third-party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this communication and are subject to change without notice. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.

Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency). Bloomberg Commodity Index is a broadly diversified index that tracks the commodity markets through commodity futures contracts and is made up of exchange-traded futures on physical commodities, which are weighted to account for economic significance and market liquidity. S&P 500 Index is widely regarded as the best single gauge of large-cap U.S. equities. The index is a float-adjusted, market-cap-weighted index of 500 leading U.S. companies from across all market sectors including information technology, telecommunications services, utilities, energy, materials, industrials, real estate, financials, health care, consumer discretionary, and consumer staples.

Benchmark index returns are not Fund returns and do not reflect any management fees or brokerage expenses. Certain indices may take into account withholding taxes. Investors cannot invest directly in the Index. Returns for actual Fund investors may differ from what is shown because of differences in timing, the amount invested and fees and expenses. Index returns assume that dividends have been reinvested.

The S&P 500 Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Van Eck Associates Corporation. Copyright © 2021 S&P Dow Jones Indices LLC, a division of S&P Global, Inc., and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit www.spdji.com. S&P® is a registered trademark of S&P Global and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.

This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities/financial instruments mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third-party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.

An investment in the VanEck Inflation Allocation ETF (the “Fund”) may be subject to risks which include, among others, in fund of funds risk which may subject the Fund to investing in commodities, gold, natural resources companies, MLPs, real estate sector, infrastructure, equities securities, small- and medium-capitalization companies, foreign securities, emerging market issuers, foreign currency, credit, interest rate, call and concentration risks, derivatives, cryptocurrency, cryptocurrency tax, all of which may adversely affect the Fund. The Fund may also be subject to affiliated fund, U.S. Treasury Bills, subsidiary investment, commodity regulatory (with respect to investments in the Subsidiary), tax (with respect to investments in the Subsidiary), risks of ETPs, liquidity, gap, cash transactions, high portfolio turnover, model and data, management, operational, authorized participant concentration, no guarantee of active trading market, trading issues, market, fund shares trading, premium/discount and liquidity of fund shares, and non-diversified risks. . Foreign investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, and changes in currency exchange rates which may negatively impact the Fund's returns. Small- and medium-capitalization companies may be subject to elevated risks.

Information provided by VanEck is not intended to be, nor should it be construed as financial, tax or legal advice. It is not a recommendation to buy or sell an interest in cryptocurrencies.

Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.

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