ETF NEWS - ULTUMUS

Stagflation ETF

Written by Bernie Thurston | 6 May 2022

Merk launches stagflation ETF

Those worried about high inflation and low GDP growth now have an ETF. Merk has launched a multi-asset ETF that buys things thought to do well when inflation rises.

 

The Merk Stagflation ETF (STGF) will track the Solactive Stagflation Index, which was purpose built for this fund.

The index is overwhelmingly made of TIPS, which take between 55 - 85% of the index weight. What weight remains gets spread between REITs, gold and oil, which can each take between 5 – 15%.

 

The fund accesses these assets – i.e. TIPS, REITs, gold – via other ETFs. Its main holding is the Schwab US TIPS ETF (SCHP), which has the lowest expense ratio of any TIPS ETF.

 

The fund has an unusual rebalancing strategy. Rather than rebalancing to a set schedule – i.e. quarterly – it rebalances only when any of the four holdings tread beyond their set weights.

 

The fund charges 0.45%.

 

Bernie’s commentary – inflation and commodities

As a rule, commodities are the best hedge against inflation. If you need any proof of this just look at how gold, oil, agriculture, livestock, coffee etc. have all performed the past six months.

 

Then compare it with TIPS, stocks, and all the rest. You’ll see that commodities have clearly outperformed.

 

There is something tautological about commodities doing well when inflation rises. After all, inflation indexes are mostly just commodity indexes. Oil and gas are two of the most heavily weighted constituents in inflation indexes. So when the price of oil goes up, inflation goes up by definition. It’s a natural hedge.

 

While commodities have done well, TIPS have not. So it is surprising that this ETF has given such a heavy weighting to TIPS against commodities, given the performance difference. Then again, maybe the next six months will look very different for TIPS – I don’t know.

 

I’d also have to ask what the value-add is. As this fund is just a fund of funds (an ETF of ETFs) you always have to ask: ‘what’s to stop investors just doing this themselves?´ That is, what’s to stop them just buying a TIPS, REIT, gold and oil ETF directly and cutting out this ETF? Why do investors need STGF?

 

I’m sure there’s an answer. But it may need to be spelled out.