In the face of record inflation, the Virtus Real Assets Income ETF (VRAI) has done extraordinarily well, up 19% year-to-date, and significantly beating the S&P 500, which is up 14%. On top of this, the ETF generates compelling income of 3%, well above the 10 Year US Treasuries at 1.5%.
Investing in real assets is a winning strategy in an inflationary environment because tangible assets such as real estate, natural resources and infrastructure have intrinsic value. VRAI is the first ETF focused on real assets. Additionally, because of VRAI’s focus on income-generating real assets, VRAI also generates attractive income.
In terms of ETF construction, VRAI is designed to be one-stop solution for real asset exposure. VRAI consists of 90 US-traded companies, equally divided between real assets, natural resources, and infrastructure. Companies are filtered based upon market capitalization and selected based upon dividend yield. All stocks are equally weighted to ensure portfolio diversification.
Finally, in terms of costs, VRAI is very competitively priced at 55 bps (0.55%). This stands stark contrast to most energy and real estate ETFs and mutual funds, which typically cost over 100 bps (or 1%).
For more information on the investment case, check out this research piece produced by Virtus
n.b. This is sponsored content and not FINSUM editorial
Investors have gotten so used to low inflation that it is sometimes hard to imagine seeing it rise. However, Morgan Stanley is warning that inflation is rising across the globe and investors need to keep an eye on it. In Europe, Asia, and the US, inflation has risen from 1.1% to 1.4%, and it is bound to move higher, according to Morgan Stanley’s chief global economist. Interestingly, MS argues that the Euro area and Japan will see a higher rise in inflation than the US.
FINSUM: If inflation rises more strongly in other developed markets than the US, will that lead to even more foreign buying of US bonds because yields in those locations are so much lower? In other words, will there be even more demand for US bonds?
As almost all investors are aware at this point, global markets, including the US, saw huge moves in yields yesterday. Trading of the 10-year US Treasury bonds saw yields as high as 3.22% today, sharply higher than just a week ago. The Dollar also soared. This led to a big selloff in stocks as well as major losses across emerging markets and US corporate bonds.
FINSUM: In our view, there are two ways to interpret this big move higher in yields. One is that it was just reactionary to new US economic data and that yields will stall again. The other is that the market has finally woken up to the reality that higher rates and yields are a certainty and that expectations need to be reset. We favor the latter view and think this could be a paradigm-shifting move that finally sparks losses in bonds and rate-sensitive stocks.
The Fed has hiked rates many times over the last couple of years, but the overall attitude of Fed officials has been very relaxed. They have been diligent to project a very mild outlook of rate hikes. However, that may be set to change, argues the Financial Times. The US economy is growing very strongly, and the odds that the Fed may have to adopt a much more hawkish position are growing. The Fed’s hikes, though frequent, have been small, meaning policy is still accommodative and pro-growth. However, given the state of the expansion, a sharp move higher in rates is looking increasingly necessary.
FINSUM: Given the Fed’s most recent statement, this argument carries some weight. We can see Powell and the team getting more hawkish. That said, the economic tailwind of tax changes is fading, so perhaps it won’t be necessary.
Several Wall Street analysts are warning that the US will fall into a recession in 2019. Some are even pegging the odds as high as 100%. The reason for the recession will be the increasingly aggressive Federal Reserve, which yesterday adopted a more hawkish stance on the economy and rates (with a more aggressive dot plot and the removal of “accommodative” from its policy statement). The current trade war is the other big factor which could push both the US and global economy into recession, as international trade is already contracting.
FINSUM: Forecasting the timing of the next recession seems futile to us. However, we will admit that the Fed adopting a more hawkish stance (and the fact that the funds rates is now higher than inflation) worries us.
The market took a big hit yesterday following the Fed’s expected rate hike. However, it was not the rate hike itself that caused the problems, rather it was the Fed’s statement and its dot plot. The Fed removed the word “accommodative” (regarding its policy) from its statement, which combined with its more hawkish dot plot, got investors worried. The Fed funds rate is now higher than inflation for the first time in several years. Stock markets fell on the news, with the Dow dropping 0.4%.
FINSUM: The Fed getting more hawkish should make investors worried, as the more restrictive Fed policy becomes, the sooner (and more likely) a recession will arrive.