RAAX - RAAX: Counterintuitively Disinflation May Be Bullish For Real Assets Into 2024

2023-11-30 06:51:06 ET

Summary

• The VanEck Inflation Allocation ETF is an actively managed ETF of ETFs targeting exposure to real assets.
• The strategy has outperformed a peer group of commodity focused or inflation hedging equity ETFs in 2023.
• We believe RAAX should benefit from easing inflation and declining interest rates as supportive to the demand for commodities including gold into 2024.

The VanEck Inflation Allocation ETF (RAAX) invests across real assets and resource-producing equities expected to benefit through various inflationary environments. The strategy stands out by regularly adjusting its exposure between targeted ETFs through a quantitative process. By this measure, RAAX is recognized as an actively managed ETF of ETFs.

Even as the theme of "inflation" has lost momentum with the latest U.S. CPI reading at 3.2% compared to the narrative in 2022, RAAX has managed to perform well, beating out peer ETFs over the past year.

We like the fund with a sense that its current allocation is well-positioned to rally into 2024 even in what is expected to be ongoing disinflation. As we see it, the prospects for Fed rate cuts while the global economy remains resilient should support commodities through a rebound of cyclical demand. The fund's positioning in gold funds is also positive for its outlook.

What is the RAAX ETF?

RAAX attempts to maximize real returns while minimizing downside risk through real assets. In this case, the fund covers not only commodities and real estate but also related equities expected to work as an inflation hedge.

At the same time, the understanding is that different segments within this theme may perform better over different periods, which allows the investment management team at VanEck to shift those "inflation allocations" toward the real assets that best reflect the current outlook.

The fund uses a combination of targeted or category-specific exchange-traded funds, including ETFs within the same VanEck fund family, to achieve an optimal positioning according to the proprietary rules-based model.

Going through the current portfolio, RAAX utilizes the VanEck Commodity Strategy ETF (PIT) as its largest holding with a 23% weighting. PIT is more of a straightforward commodity futures price tracking fund with positions in everything from metals, energy, and agriculture contracts. The rest of the portfolio sort of builds on that "core" investment by effectively overweighting certain segments.

Notably, gold and precious metals have emerged as an important theme for RAAX considering the VanEck Merk Gold Shares ETF (OUNZ) with a 19% weighting. Furthermore, we find the VanEck Gold Miners ETF (GDX) with a 6% allocation, along with a smaller position in the iShares MSCI Gold Strategy ETF (IAUF), and SPDR Gold Minishares Trust (GLDM).

In total, gold-related investments including mining stocks represent more than 30% of the underlying exposure. The interpretation here is that the strategy is particularly bullish on this category of "inflation fighters".

Energy is also well represented. RAAX includes the VanEck Energy Income ETF (EINC), Energy Select Sector SPDR Fund (XLE), the SPDR S&P Oil & Gas Exploration and Production ETF (XOP), and the VanEco Oil Services ETF (OIH) among top holdings together with a 21% weighting.

Down the list, we also find REITs through the Vanguard Real Estate ETF (VNQ) and the Nuveen Short-Term REIT ETF (NURE) as fitting into the real assets strategy. Just keep in mind that these positions are subject to change, and the portfolio appeared very differently even last year.

Finally, we can mention that the fund distributes a quarterly dividend which currently yields 1.5%. The fund's expense ratio at 0.87% is elevated, but otherwise in line with the category for commodity funds and in the context of active management.

RAAX Performance

RAAX technically uses the "Bloomberg Commodity Index" as a performance benchmark, although it's not quite an apples-to-apples comparison. The problem here is that this index simply tracks commodity futures, and is overweight energy, industrial metals, and the grains market compared to RAAX.

Furthermore, the Bloomberg Index does not include real estate or global infrastructure stocks making it a poor reference point over most periods. The same can be said with alternative benchmarks such as the "Goldman Sachs Commodity Index, proxied through the iShares S&P GSCI Commodity-Indexed Trust (GSG).

So while we included that chart at the top showing RAAX has outperformed in 2023, the fund has lagged its peer group over the past 3 years. Part of that spread between its 23% cumulative return since late 2020 compared to a 62% gain from the GSG ETF, for example, reflects the latters' overweight exposure to the oil market, which climbed significantly between 2021 and 2022.

We can point out that gold through the SPDR Gold Shares (GLD) is up just 9% in the last three years, which likely dragged RAAX's performance as it has favored precious metals as an inflation hedge.

The takeaway here is that RAAX's return history leaves a lot to be desired and is far from exceptional, but that profile needs to be placed in the context of its particular exposure. What's more interesting to us is how the fund could outperform going forward.

RAAX 2024 Outlook

Maybe counter-intuitively, we believe RAAX should benefit from a trend of global disinflation into 2024. The setup here is that favorable inflation data in the U.S. which has surprised to the downside is now opening a door for the Fed to consider rate cuts over the next year. This in turn has translated into a weakening U.S. Dollar as supportive of risk sentiment.

The implication is that global growth could get a boost as credit conditions become less restrictive, or at least as concerns of even higher rates dissipate. Stronger demand from emerging markets should be positive for commodities overall on the demand side.

As it relates to the RAAX ETF, its positioning in gold funds and precious metals is poised to benefit. The reason for this is that as rate cut expectations build, lower real interest rates against declining inflation make precious metals relatively more attractive.

We're watching an apparent breakout in the price of gold which is a tailwind for mining stocks in the segment, including the holdings within the RAAX portfolio.

Naturally, with a bullish view towards gold, it makes sense that a more targeted precious metals fund or gold mining exposure would be the best bet. Still, the attraction here is the fund's more balanced profile that captures those high-level trends but also includes energy, agriculture, real estate, and infrastructure which should perform well in this environment.

That layer of uncertainty makes RAAX a good option to complement a more diversified portfolio. With shares trading near $26.00, a level that has represented technical resistance since early 2022, our call is that the next leg is higher.

In terms of risks, while disinflation could be "good", a scenario of deflation or a deterioration of global economic conditions would be more concerning. A reversal lower in commodity prices would pressure the RAAX strategy and open the door for a larger selloff. In our view, the trading action in the U.S. Dollar as well as gold prices are the key monitoring points.

Final Thoughts

RAAS is not a perfect fund, but serves its purpose as a unique option for diversified exposure to real assets. It will likely take several more years to confirm if the strategy can consistently generate excess returns relative to benchmarks, but recent trends are encouraging. In our view, RAAX is a good option for investors to complement a portfolio.

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