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ETF Wrap: This ETF manager’s tactical models are ‘as bearish as they could possibly be’ as markets grapple with a ‘dangerous’ mix of rising rates and high inflation

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.

Please send feedback and tips to christine.idzelis@marketwatch.com. You can also follow me on Twitter at @cidzelis and find me on LinkedIn.

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
VAMO,
-0.61%

and Cambria Global Momentum ETF
GMOM,
+0.18%
,
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.”  

Read: ‘Managed futures are like pigs in mud’: This ETF manager is replicating hedge-fund strategies to pull off big gains as stocks and bonds drop this year

The Cambria Global Momentum ETF’s holdings as of Sept. 21 included exposure to the iMGP DBi Managed Futures Strategy ETF
DBMF,
+0.18%
,
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
SPX,
-0.41%

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.

Read: S&P 500 sees its third leg down of more than 10%. Here’s what history shows about past bear markets hitting new lows from there, according to Bespoke.

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
SPY,
-0.37%

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
TMUBMUSD10Y,
3.702%

was surging 18 basis points to around 3.69% Thursday afternoon, while the rate on the 2-year Treasury note
TMUBMUSD02Y,
4.113%

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.

Meanwhile, Invesco QQQ Trust
QQQ,
-0.77%
,
which tracks the Nasdaq-100 index, was down 0.8% on Thursday afternoon, FactSet data show, at last check. The ETF, which provides exposure to growth and tech stocks, has plunged more than 29% this year based on afternoon trading.

As usual, here’s your look at the top and bottom performing ETFs in the past week through Wednesday, according to FactSet data.

The good…

Best Performers

%Performance

iShares MSCI Brazil ETF
EWZ,
+3.28%

3.0

abrdn Physical Silver Shares ETF
SIVR,
+0.21%

2.4

iShares Silver Trust
SLV,
+0.19%

2.4

iShares Latin America 40 ETF
ILF,
+1.75%

2.1

Invesco DB US Dollar Index Bullish Fund
UUP,
+0.08%

1.4

Source: FactSet data through Wednesday, Sept. 21, excluding ETNs and leveraged products. Includes NYSE, Nasdaq and Cboe traded ETFs of $500 million or greater.

…and the bad

Bottom Performers

%Performance

ARK Genomic Revolution ETF
ARKG,
-2.36%

-10.0

ARK Innovation ETF
ARKK,
-3.72%

-9.8

ARK Fintech Innovation ETF
ARKF,
-3.78%

-9.2

ARK Next Generation Internet ETF
ARKW,
-3.97%

-8.8

SPDR S&P BIOTECH ETF
XBI,
-0.78%

-8.2

Source: FactSet

New ETFs

Carbon Collective Investing announced Sept. 20 the launch of the Carbon Collective Climate Solutions U.S. Equity ETF
CCSO,
-2.02%
,
an actively managed exchange-traded fund that invests in companies dedicated to solving climate change.

The Newday Sustainable Development Equity ETF
SDGS,
-1.25%
,
an actively-managed fund that invests primarily in companies adhering to one or more of the seventeen United Nations Sustainable Development Goals, began trading last week, according to Newday’s website

Strive Asset Management said Sept. 20 that it launched the Strive 500 ETF
STRV,
-0.25%

to provide diversified exposure to large-cap U.S. companies. The firm will use shareholder engagement to press companies to focus on their mission instead of “someone else’s social agenda,” according to the statement.

Check out: Republican lawmakers likely to target ‘woke capitalism’ after the midterm elections, analysts say

Weekly ETF reads

New ETFs with tickers NANC, KRUZ aim to track lawmakers’ stock buys, as ban on congressional trading looks unlikely before midterm elections (MarketWatch)

Bond ETFs fall ahead of expected Fed rate hike (MarketWatch)

Treasury ETFs See Record Inflows Despite Declines (Wall Street Journal)

ETF Issuers Raise Guard Amid SEC Crackdown (ETF.com)

Cathie Wood hands over portfolio manager role on two ETFs at Ark (Financial Times)

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