San Francisco-based Merk Investments has launched its first solo ETF in the US, a multi-asset fund that is designed to perform well during periods of stagflation.

The ETF targets assets that are expected to perform well during periods of high inflation even in environments of weak economic growth.

The Merk Stagflation ETF (STGF US) has been listed on NYSE Arca with an expense ratio of 0.45%.

Stagflation refers to a situation in which the inflation rate is high but economic growth has stalled and unemployment remains elevated. It presents a dilemma for monetary policy as actions intended to lower inflation may exacerbate joblessness.

The ETF’s launch is timely, coming as inflation is surging to multi-decade highs while US gross domestic product shrank by 1.4% in Q1 2022, surprising analysts who were expecting growth of 1% in the quarter.

Despite the US economy’s unforeseen contraction, equity markets remained relatively stable, indicating that investors believe growth was primarily hampered by transitory factors such as the surge in Omicron cases and the outbreak of war in Ukraine. Whether the US economy can shrug off the poor result, or will indeed be subject to a recession, remains to be seen.

Methodology

The ETF is linked to the Solactive Stagflation Index which comprises a long-only strategy targeting assets that are expected to benefit from persistent inflation even in an environment of weak economic growth.

The index consists of a core allocation to four asset classes: US Treasury Inflation-Protected Securities (which has a base weight of 70%), gold (10%), crude oil (10%), and real estate (10%). Exposure to each asset class is obtained via ETFs.

The index’s actual allocation to the four asset classes, however, is also influenced by a proprietary trend-following strategy that tilts weights accordingly at the end of each trading day. The allocation to US TIPS could range from 55% to 85%, while the allocations to gold, crude oil, and real estate would be set within the bounds of 5% to 15%.

Commenting on the launch, Nick Reece, Vice President of Merk Investments, said: “STGF is the first stagflation-themed ETF in the market. We think it will be embraced by advisors and retail investors concerned about inflation and the outlook for traditional 60/40 portfolios and that might be looking for an alternative to traditional fixed income allocations.”