In my recent note on the Fidelity Stocks for Inflation (FCPI) ETF, I laid out a few reasons why exposure to inflation-friendly stocks, when the market appears to be adjusting risk discounts downwards, might be worth it. prove be a painful disappointment.
There is no denying that the revival of the hawks has put a damper on the turmoil in the markets at the start of this year, and the inflation that implies higher interest rates, a higher cost of capital and weaker future growth. was the main reason. But after July’s CPI and PPI reports as well as somewhat soft economic data out of China that could cool the commodity market, betting on prices across the economy to climb even higher, especially since the Fed is clearly not hesitating to undertake significant hikes if necessary, is a precarious move.
VanEck Inflation Allocation ETF (NYSEARCA:RAAX) is yet another inflation-focused investing vehicle I’d like to discuss. The reasons I don’t like it are mostly based on the premise that inflation is about to or has probably already plateaued. And since the performance of the RAAX strategy during periods of moderate inflation was simply lackluster, gaining exposure to the fund at this stage is extremely risky. Additionally, cost-averse investors here would note that an expense ratio of 74 basis points is a painful detractor of returns, especially over the long term. It is therefore difficult to build a bullish thesis for this ETF.
How does RAAX calibrate the portfolio to outsmart inflation?
As the fact sheet tells us, RAAX focuses on increasing real (inflation-adjusted) returns while trying to minimize “downside risk during sustained market declines.” That is, there is a market timing ingredient in this strategy.
Please note that the fund was renamed in June 2021; prior to that, it was known as VanEck Vectors Real Asset Allocation ETF.
RAAX’s investment philosophy is based on the active multi-asset approach. Concretely, it is the fund of funds which groups together various ETFs supposed to outperform when inflation becomes a concern for the economy. The selection process is exclusive, with few details available.
These ETFs are selected primarily from the universe of real assets with particular attention paid to commodities, including oil and agriculture, but there are also other classes traditionally considered capable of benefiting from inflation, such as real estate, infrastructure and MLPs, among others. Gold is also on the shortlist. Additionally, in the past, RAAX has invested in bitcoin and clean energy ETFs like VanEck Vectors Low Carbon Energy (SMOG), which is a somewhat unconventional way to defy inflationary pressures assuming these assets have a fairly short story. Anyway, I don’t see any BTC-focused funds or clean energy coins in the portfolio as of this writing.
An important note is that the fund attempts to time the market, and when the managers see sentiment as clearly bearish, it may switch to a 100% cash and cash equivalents position.
In the current iteration, RAAX holds 20 stakes, including a meager cash position of just 16 basis points. The fund is heavily concentrated in the Invesco DB Optimum Yield Diversified Commodity Strategy ETF No K-1 (PDBC), with over 22.6% allocated. VanEck Merk Gold (OUNZ) shares are another large position representing 16.5%. There are also smaller allocations to iShares Gold Trust (IAU) and SPDR Gold MiniShares Trust (GLDM), as well as iShares Gold Strategy ETF (IAUF), together accounting for around 44 basis points. It should be noted that RAAX also has indirect exposure to the price of gold as it also favors the ETF VanEck Vectors Gold Miners (GDX) which invests in companies that benefit from cash flow and increased profits when demand for the yellow metal is boiling.
It is mainly exposed to oil through the fund Energy Select Sector SPDR (XLE) and the SPDR S&P Oil & Gas Exploration & Production ETF (XOP); The VanEck Vectors Oil Services ETF (OIH) is an indirect bet on the price of crude to stay higher for longer.
Overall, natural resources dominate in its composition, with category weightings as follows:
Lackluster performance before inflation took off is a warning sign
First, let’s look at the performance of RAAX against the iShares Core S&P 500 (IVV) ETF. The table below highlights periods when the VanEck ETF has outperformed the market.
Launched on April 9, 2018, RAAX has underperformed IVV every year, including the eight months of 2018, resulting in a CAGR of 1.5% (excluding August 2022). It wouldn’t be an exaggeration to say that risk-adjusted returns are also poor. Specifically, with IVV offering a Sortino ratio slightly above 1 (2 is the target), the fund only achieved 0.15.
Dear readers would probably answer here that for most of this period inflation was something of secondary importance, and the market narrative was first controlled by the trade war, then the coronavirus recession came and took rendered all previous economic forecasts irrelevant.
CPI changes were hovering around the 2% target, and it was in 2021 that the fear of inflation began to capture investors’ attention before becoming the overarching theme across the globe, as even markets as frozen as Switzerland or Sweden had to recognize that price growth could no longer be tolerated. It is certainly true. Not coincidentally, we see that RAAX outperformed IVV massively five times in 2022, only finishing behind the market in June and July when the technology and growth cohorts started to recover.
Let’s also compare its one-year performance to IVV as well as the SPDR SSGA Multi-Asset Real Return ETF (RLY) for better context.
Clearly, RAAX eclipsed the market, with the lowest correlation of the bunch, but pure equity inflation ETFs still fared much better. RLY, which is more like the VanEck fund with a multi-asset approach, also beat it, with a higher CAGR and lower standard deviation.
In closing, I would say that the fund is relatively new, and extrapolating from its abysmal performance during the era of low inflation to build a multi-year bearish thesis would be a mistake. However, this data is a clear warning, and I see no reason to defend the bullish side either.
RAAX has seen astronomical growth in its AUMs, growing approximately 1,247% in the past year and over 413% in the past six months. Does that mean it’s worth pursuing now? The explosive growth of the Ark Innovation ETF (ARKK) AUM during the tech pandemic hype is a succinct illustration of how risky it can be to launch bets on the themes that are in the spotlight.
The inflation theme has also become overhyped, making recipients most susceptible to underperformance when it falls out of favor.
In sum, I am of the opinion that investing in RAAX does not make sense at this stage.
If past performance is any guide, investors will see above-market returns when the economy hits an overheated phase marked by high inflation, and then those gains will gradually evaporate amid normalization as the RAAX strategy was unable to provide significant returns during periods of moderate inflation. , as in 2018 and 2019. Meanwhile, spending will also eat away at returns. Thus, signs of slowing price growth are a strong reason not to consider increasing allocations to inflation-friendly ETFs, whether pure equity funds or multi-asset funds. . Also, I see no good reason to sell the fund at these levels as well, so a Hold rating would be an optimal choice.