When Fighting Inflation, Diversification Matters

With high inflation persisting, a clear lesson is emerging for investors: It takes a variety of assets to buffer a portfolio against rising consumer prices.

Those include commodities, real estate, and Treasury Inflation Protected Securities (TIPS), among others. However, allocating to that many asset classes and at the right percentages is a burden for many everyday investors.

The VanEck Inflation Allocation ETF (RAAX) is an example of an exchange traded fund that eases that burden. RAAX, which turned four years old earlier this month, is home to 23 holdings. That’s a strong indication that the fund provides investors with a broad-based inflation-fighting option. Some ominous history pertaining to Federal Reserve rate hikes also underscores the viability of RAAX in today’s climate.

“In all events since 1970, raising interest rates to combat inflation resulted in rising unemployment. We are now contending with the worst bout of inflation since the 1970s,” says David Schassler, VanEck portfolio manager and head of quantitative investment solutions. “During that period, the tightening process to combat inflation resulted in an unemployment rate of 10.7%. That level exceeded the unemployment rate during the Global Financial Crisis of 2008!”

Should Fed rate tightening harm the economy, RAAX is an ETF to consider because it’s home to an array of safe haven assets, including several ETFs with gold exposure. RAAX uses an ETF of ETFs approach, and its holdings include both VanEck products and those from third-party issuers.

RAAX’s extensive commodities exposure is also relevant today not only because of high inflation but also due to Russia’s invasion of Ukraine.

“Historically, wars have coincided with higher inflation. Russia is a top three global supplier of energy, base metals, precious metals, bulk metals, fertilizers and soft commodities,” adds Schassler. “Its significance as a commodity producer, combined with pre-existing supply and demand imbalances in the commodity markets, make this conflict particularly inflationary.”

RAAX holdings currently include the VanEck Merk Gold Trust (OUNZ), the VanEck Vectors Agribusiness ETF (MOO), the VanEck Vectors Oil Services ETF (NYSEArca: OIH), and the VanEck Vectors Mortgage REIT Income ETF (MORT), among others. Translation: RAAX has the diversification investors need to survive and thrive as inflation persists.

“We believe that the key to successfully navigating this environment is to own a diversified mix of inflation-fighting assets and to own enough of them to protect your portfolio if, as we expect, this high inflation regime continues. Based on previous inflation cycles, we estimate that allocation should be approximately 15% of your total portfolio,” concludes Schassler.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.