The New Stagflation ETF

Axel Merk's company just launched a stagflation ETF. The proper name is the Merk Stagflation ETF and the symbol is STGF. I've known Axel for quite a few years, he's a smart dude and I'm always interested in what he has to say about macro topics and anything strategic like a fund that attempts to do well in a stagflationary environment. 

First the nuts and bolts, it's an ETF that owns other ETFs. It looks like it will always own the same four ETFs but in different weightings potentially based on the firm's investment process. Here's what the website shows for current holdings and weightings:

• Schwab US TIPS ETF (SCHP) 63.39%
• Invesco DB Oil Fund (DB) 13.62%
• Vanguard Real Estate ETF (VNQ) 11.67%
• Van Eck Merk Gold Shares (OUNZ) 11.43%

The exposures at first glance make sense. TIPS obviously benefit from the flation. Gold certainly should benefit and although I am not arguing against gold for inflation it is important to understand it does not have to go up it more of a should or a probably will. 

Including oil is a little more curious. There's certainly a good argument for commodities going up in price, they are priced in dollars so everything else being equal as the value of dollars suffers, commodity prices should go up. Should and probably will but not guaranteed, something else could also move the prices of the commodities, not just price inflation.

The most curious holding is VNQ. The value of raw land or farm land should go up and probably will go up, again qualified with the possibility of other factors moving the price. But looking at VNQ, the holdings look mostly pro cyclical meaning they would correlate with the economic cycle and the whole premise of STGF is to benefit from a economically stagnant outcome.  

I've never been a fan of REITs as any sort of defensive holding. When things go poorly in the stock market, REITs also tend to do poorly. Over the last five years, VNQ has gone down with a high correlation to equities when equities have gone down with the easiest examples to see as the fast crash at the end of 2018, the Pandemic crash in 2020 and whatever you would call the current event.

 

Obviously REITs got crushed in the Financial Crisis and while they did do well during the tech wreck, there were plenty of non-tech sectors and industries that also did well, so nothing special about REITs back then. Capturing land or things like timber land in an exchange traded vehicle of any type is difficult, they do tend to look more like the stock market when the stock market goes down. Regardless of the structure, they are things that can be sold in brokerage accounts when people panic. 

If I was going to build something like this, I would want TIPS but I generally prefer shorter dated which I own for clients and personally with symbol STPZ. Yes on gold. I think I'd want to go broader though than just oil with the other commodity allocation. What is the sample size for stagflations? Is it one time? If so, then I am not sure I would bank so much on what oil did last time. Did oil do well because of the stagflation or was it a contributing factor that caused the stagflation back then? I suspect the latter. If the war in Russia ended today, I think the knee jerk would be the price would come down fast and then who knows what? If the model here is protecting against stagflation, I don't think I want an exposure that could so easily and visibly be moved by unfolding geopolitical events. 

I think I'd also want tail protection and something that captures a variation of trend following. I agree with the disproportionate weighting to TIPS.

Lastly, I would layer in a small slice of Bitcoin. I have no argument to make in support for Bitcoin being anti-stagflationary. It does its own thing. Sometimes it trades with risk on and sometimes with risk off. If we end up with stagflation and it persists for a year and a half or two, who knows, that might be when Bitcoin has its next 10X run. 

Zooming out a little, I think of STGF as a way to buy low or more likely negative correlation to the economic cycle and the stock market. In a strategy with low and negative correlation, there's a little bit of room IMO for something with no correlation like Bitcoin.