INFL - INFL: ETF To Consider When Inflation Spikes Again

2023-12-05 17:37:03 ET

Summary

• Horizon Kinetics Inflation Beneficiaries ETF (INFL) aims to profit from sectors, industries, and companies that perform well during periods of above-average inflation.
• INFL primarily invests in commodity-related companies, with a supplementary allocation to consumer and financial sectors.
• The current market perception is that inflation has peaked, making INFL a hold rather than a buy.

One of the things I most enjoy about being an investment researcher is that all the things I studied and experienced years ago eventually come back into fashion. Like dealing with inflation. It took a break. A very long break of about 14 years. But since it has come back into relevance, so too does any ETF that stands a chance to capitalize on that.

Horizon Kinetics Inflation Beneficiaries ETF ( INFL ) aims to profit from sectors, industries and companies that traditionally have done well during periods of above-average inflation. That does not mean they will in the future. But they have in the past. INFL does this through active equity investments primarily in commodity-related companies, with a supplementary allocation to consumer and financial sectors, since segments of those are traditional inflation beneficiaries.

I wrote about INFL back on March 3 of this year. In stating that it is part of the watchlist of over 100 ETFs I focus on for inclusion in my tactical portfolio models, my main holdup on finding a spot for it, other than the aforementioned "needs inflation fears to be effective" was the rangebound nature of INFL's collective portfolio. That has not changed.

But as the above chart shows, what has changed is that T-bills, as characterized by the SPDR Bloomberg 1-3 Month T-bill ETF ( BIL ), is that the benefit of "doing nothing" continues to stay high. That means that rangebound technicals, such as with INFL currently, are not sufficiently attractive to me. So, no change in view, nine months later.

But INFL is still one to track, as it will likely have its day as inflation re-accelerates at some point. But since I can't predict when that will be, INFL continues to sit lower on my ETF "depth chart." But it remains on the list since, as I noted back in that March article:

It is not often you see an ETF that includes all of the following: traditional listed U.S. stocks, royalty trusts, a significant non-U.S. stock allocation, MLPs, and a group of listed stocks of commodity exchanges in different parts of the globe. INFL is an eclectic mix at first glance. But it all fits together when considering the range of anti-inflation tools this ETF brings together under one roof.

But the reason I can’t get terribly excited about INFL at this point is that the market’s strong perception is that inflation has peaked, at least for now. Inflation tends to be cyclical, and once it arrives it doesn’t go away completely. That’s the lesson of the 1970s. So INFL should be viewed just as inflation should be: as a potential role player to “rent” for a few months to a year or so at a time, and as long as inflation fears are accelerating.

That time is not now, which is why I rate it a Hold and not a Buy. Its price pattern is neutral enough versus the S&P 500 to prompt me to settle on a middling rating for now. While a potentially useful tool in the investing arsenal, INFL had its best moments when inflation skyrocketed and it is now treading water.

Inflation: receding but not forgotten (by me)

Inflation has been a key narrative over recent years as we all watched rates spike to levels roughly not seen in the last 30 years. As we ride this current wave of inflation, it makes sense to analyze if we should consider allocating to ETFs that a) could benefit from current conditions, and b) also act as a bet on a potential paradigm shift in what worldwide inflation could look like going forward.

The chart below shows the current global inflation rate to be sitting around 6.9%, with projections for the coming years. Even if we do drift down to the 4% range, that’s still quite elevated compared to the recent past and suggests that ETFs that are inflation-minded might have an edge.

INFL invests primarily in domestic and foreign equities of companies that are expected to benefit from rising prices of real assets, i.e. whose revenues are expected to increase with inflation without corresponding increases in expenses. Among the top holdings we see companies involved in oil, natural gas, water, metals, food processing, and commodity marketplaces – all of these make sense as commodities are the classic inflation-minded investment, and INFL decently diversifies across various commodity types.

That said, INFL can certainly lose its spot on my watchlist going forward. Its correlation to SPY hovers near 1.0 a majority of the time, with occasional "crashes" in correlation toward zero. That's why I view it as more likely a rental instead of a buy and hold candidate.

What might I have missed here?

There are two main counterarguments here. First is that other macro factors besides the current state of inflation could start to play a bigger role in fund performance. This is naturally open-ended, but what I would look for is either outperformance of INFL against the SPY or a more consistent reduction in correlation.

Second is that since this is an actively managed and fairly concentrated ETF, there is always room for either large outperformance in a few select portfolio names, or for the fund to gently shift its portfolio makeup to take advantage of the slight flattening in inflation that we are currently experiencing. This could be signaled if we see strength compared to its peers.

So my current bottom-line rating is Hold. While we’ve seen that the fund can absolutely deliver outsized returns when conditions are right, its recent "road to nowhere" price pattern reflects the market's view of inflation. "The worst is over for now" seems like something needs to change for it to be a solid buy again, whether that’s a shift in macro factors or something within the portfolio itself.

It does act as a hybrid between holding commodities and being involved in the equity market, but it is not at all clear that INFL currently stands out among its competition or other offerings in the market. If we see either of the counterarguments above start playing out, I would be happy to revisit and reconsider this rating.

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