Stagflation ETF Launches as Fed Attempts to Tame Sky-High Prices

(Bloomberg) -- Traders worried about the Federal Reserve's ability to tamp down ultra-hot inflation without sacrificing economic growth now have an exchange-traded fund to fall back on.

The Merk Stagflation ETF (ticker STGF), which launches Wednesday, tracks a portfolio divided between 55%-85% U.S. Treasury Inflation-Protected Securities and between 5%-15% real estate, gold and oil. The ETF charges a 0.45% expense ratio and will rebalance as needed to keep those weightings.

Trading in STGF kicks off hours before the Fed is widely expected to raise interest rates by 50 basis points -- the biggest move since 2000 -- with at least two more supersized hikes priced in this year. While the hottest inflation prints in four decades fueled the Fed's hawkish pivot, it's a difficult needle to thread as the pace of growth cools and recession warnings ring louder. That's fanned fears about stagflation -- a toxic mix of rising costs, falling employment and slow growth -- though the labor market remains hot and the American consumer has been resilient.

While the launch is well-timed, ETF Think Tank's Cinthia Murphy questioned why it doesn't have a higher weighting to commodities.

“As a general thought, the idea of a stagflation ETF is cool -- it's first of a kind and it offers advisors and investors the ability to access four different assets they might not own otherwise in one single wrapper,” said Murphy, director of research at ETF Think Tank. “I find it somewhat surprising that this ETF would not have a broader allocation to commodities.”

The Schwab U.S. TIPS ETF (SCHP), which STGF holds for TIPS exposure, has declined roughly 7.6% so far in 2022 even as price pressures surge. That's outperformed the S&P 500's more than 12% drop and the 20% plunge in the iShares 20+ Year Treasury Bond ETF (TLT), but that lags other inflation-hedging strategies.

But while there is interest-rate risk, TIPS still are the “most direct instrument to help keep up with inflation over time,” according to STGF portfolio manager Axel Merk.

“There are of course other choices one could have made,” Merk, chief investment officer at Merk Investments, wrote in an email. “Our goal is to provide a focused tool for investors to have in their tool-kit as they navigate what may be a stagflationary environment. Our goal was not to provide a kitchen sink.”

But if the U.S. truly enters a stagflationary period, there won't be any investing opportunities, Christopher Ailman of the California State Teachers' Retirement System told Bloomberg Television on Tuesday. Though such an environment is still a low risk, it's one worth watching as wages rise and supply chains remain clogged.

“I'm not going to say the word stagflation,” Ailman, chief investment officer of second-largest U.S. pension fund, said in an interview at the Milken Institute Global Conference. “It's still a low risk, but it's got to be in the vocabulary for next year. There is nothing you can invest in, there is no opportunity when you're in a stagflation environment.”