By Christine Idzelis
Hello! This week’s ETF Wrap spotlights how two ETFs are tactically positioned as they outperform a U.S. stock market grappling with a “dangerous” mix of high inflation and rising interest rates.
High inflation and rising interest rates are a “dangerous” mix for an expensive stock market, according to Meb Faber, chief executive officer of quantitative asset manager Cambria Investment Management.
“Our two tactical models right now are as bearish as they could possibly be,” Faber said by phone. He was referring to the rules-based strategies used by the Cambria Value & Momentum ETF /zigman2/quotes/206988181/composite VAMO +0.11% and Cambria Global Momentum ETF /zigman2/quotes/208166444/composite GMOM -0.32% , both of which have held up relatively well in a brutal year so far for the U.S. stock market.
Looking at the holdings of the Cambria Global Momentum ETF, he said that “the vast majority of the portfolio is de-risked and in cash and bond-like instruments,” with a small exposure to natural resources and energy positions and a “value-spread trade into managed futures.”
The Cambria Global Momentum ETF’s holdings as of Sept. 21 included exposure to the iMGP DBi Managed Futures Strategy ETF /zigman2/quotes/212244030/composite DBMF -0.48% , a fund managed by Dynamic Beta investments, or DBi, that has skyrocketed this year. The iMGP DBi Managed Futures Strategy ETF is up around 30% this year based on Thursday afternoon trading, according to FactSet data.
Meanwhile, the S&P 500 index /zigman2/quotes/210599714/realtime SPX +0.06% has tanked 20.5% this year through Wednesday. Shares of the Cambria Global Momentum ETF have fared better, down 4.2% over the same period, FactSet data show.
“Usually it looks like a globally diversified fund, but it’s pretty rare for most asset classes to be declining at the same time,” Faber said, pointing to losses in U.S. and international equities as well as declines in bonds and real estate. “There’s really nowhere that’s looking particularly safe other than hanging out in short-term Treasurys and a little bit of the energy complex,” he said.
This year shares of the Cambria Value & Momentum ETF have seen a modest gain of 2.8% through Wednesday, according to FactSet data. The fund, which invests in U.S. stocks and may hedge the portfolio, was down 0.6% Thursday afternoon, FactSet data show, at last check.
The Cambria Value & Momentum ETF holds stocks that are cheaper than the S&P 500, according to Faber, who also serves as Cambria’s chief investment officer. “The value opportunity is one that we think could make an enormous difference for a very long time in equities,” he said.
The Cambria Value & Momentum ETF doesn’t have much small-cap exposure currently, said Faber, adding that its top sector positions include energy, materials and financials, with “a pretty low” allocation to technology.
The U.S. stock market was down Thursday afternoon, extending sharp losses seen Wednesday after the Federal Reserve announced another large interest rate hike of three-quarters of a percentage point while signaling that it will keep aggressively tightening its monetary policy to tame high inflation.
Shares of the SPDR S&P 500 ETF Trust /zigman2/quotes/209901640/composite SPY +0.10% were down around 0.3% in afternoon trading, slipping as rising Treasury yields weighed on the stock market. Growth equities were broadly suffering more than value stocks on Thursday afternoon, according to FactSet data, at last check.
The yield on the 10-year Treasury note /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y -2.01% was surging 18 basis points to around 3.69% Thursday afternoon, while the rate on the 2-year Treasury note /zigman2/quotes/211347045/realtime BX:TMUBMUSD02Y -1.81% jumped 13 basis points to around 4.12%, FactSet data show, at last check. That’s after two-year Treasury yields climbed Wednesday to their highest rate since October 16, 2007 based on 3 p.m. levels, according to Dow Jones Market Data.