INFL - AXS Astoria Inflation Sensitive ETF Deserves A Place In The Sun Next To INFL And RLY

Summary

• The AXS Astoria Inflation Sensitive ETF just celebrated its first birthday and performed very well so far.
• Last year, PPI was the number 1 performer in its Morningstar category.
• Despite a 70% allocation to equities, PPI had a positive return in 2022.
• We like PPI’s portfolio composition and active management.

Inflation is here to stay. It will probably cool, but we believe it will remain in the coming years at a level above the 2% Fed-target. De-globalization, de-carbonization, and demographics are pushing inflation figures higher than we were used to in the past decade.

Due to the high inflation, 2022 was a bad year for the traditional 60/40 portfolio, as both equities and bonds were down. As an alternative, we look for exchange-traded funds ("ETFs") who can outperform in an inflationary environment. We already discussed, e.g., the equity ETFs Fidelity Stocks for Inflation ETF ( FCPI ) and the Horizon Kinetics Inflation Beneficiaries ETF ( INFL ) and more diversified ETFs like the SPDR SSGA Multi-Asset Real Return ETF ( RLY ) and the Risk Parity ETF ( RPAR ).

Today, we discuss an equity ETF that's situated somewhere in between the 100% equity inflation ETFs like INFL and FCPI and more diversified ETFs like RLY and RPAR: the AXS Astoria Inflation Sensitive ETF ( PPI ).

Last year, it was the number 1 performer in its Morningstar category (Global Allocation). Or more precisely, it was in the first percentile of the 418 funds in the Global Allocation category. By the way, RLY was also in the first percentile of the same category.

Inflation hedges

Inflation is high. Are all inflation hedges performing as expected? All major asset classes are posting negative returns in the past 12 months, with one exception: commodities (incl. gold). TIPS, REITs, and equities are down.

When we look at the performance of inflation-hedging ETFs, RLY and INFL are top performers. But they are closely followed by PPI!

About AXS Astoria Inflation Sensitive ETF

The AXS Astoria Inflation Sensitive ETF is an actively managed , broadly diversified ETF that seeks long-term capital appreciation in inflation-adjusted returns. The ETF has an expense ratio of 0.75%.

To (try to) beat inflation, PPI invests in:

• cyclical stocks (such as
  • Financials,
  • Energy,
  • Industrials and
  • Materials),

• commodities and
• TIPS.

The blended benchmark of the fund is comprised of:

• 70% MSCI All Country World Index,
• 20% Bloomberg Commodity Total Return Index and
• 10% Bloomberg US TIPS 1-3 Year Index.

This places PPI somewhere in-between the 100% equity inflation ETFs like INFL and FCPI and more diversified ETFs like RLY and RPAR.

PPI certainly managed to outperform its benchmark, both when the benchmark was down as when the bench was up, like it was over the last quarter of 2022.

The active management is paying off! The fund managers believe we can no longer count on the tailwinds of the past decade: low interest rates, low inflation, and a Fed-put. The current environment is characterized by higher interest rates, high inflation, and the absence of a Fed-put. That's why the portfolio is geared towards commodities, TIPS, value vs. growth, short-duration assets vs. long-duration assets and dividend payers vs. unprofitable growth stocks.

In December, the fund managers rebalanced the portfolio. They lowered the equity allocation and increased the fixed income allocation, mainly through TIPS. They also decreased the equity-like commodity exposure and increased the precious metals exposure while establishing even an outright position in gold given looming recession signals and a weaker dollar.

PPI focuses on cyclical stocks in sectors such as Financials, Energy, Industrials and Materials. These are, next to Healthcare , the sectors with the best long-term trend readings.

So, we certainly like the equity sector selection. What about the commodity and fixed income exposure?

Both TIPS and the Bloomberg Commodity Total Return Index are in a long-term downtrend. The fund is of course actively managed, and the commodity exposure is mainly through an investment in gold, which is no longer in a long-term downtrend.

Rising real yields are a headwind for gold. They also lead to a stronger dollar, which is another headwind for gold. The past month's lower real yields and a lower dollar pushed gold higher.

Rising real yields are also a headwind for TIPS. Last year, real yields rose from -1.5% to almost 2%, and this explains the bad performance for TIPS.

We do not expect those yields to rise much further, and one cannot deny that the current yield is more attractive than, e.g., one year ago (when you were guaranteed of a negative real yield).

So, all-in-all, we like PPI's current portfolio composition.

We have not much information about the valuation of the fund. The dividend yield is 1.37%.

In general, we can say the three (Financials, Energy, and Materials) of the four favorite sectors in the fund are cheaper than the S&P 500 (SP500). Only Industrials is a little bit more expensive.

Conclusion

Inflation is here to stay, and PPI is a diversified and actively managed real return ETF that performed very well in its first year.

Our favorite inflation ETFs remain RLY and INFL, but with PPI, there's certainly another useful ETF to add to our inflation hedge toolkit.

We like PPI's portfolio composition and active management. Buy!

For further details see: