INFL - INFL: This Rare Positive Performer In 2022 Is Still Hanging In

Summary

• INFL posted a total return of over 2% in 2022, something few equity ETFs accomplished.
• Inflation is not likely going away anytime soon, even if it moderates further. That makes a diversified, inflation-fighting equity ETF like INFL one to follow.
• INFL is not priced quite as attractively as I'd like in order to issue a more positive rating than hold, so that's where I stand on it for now.

By Sweta Shah

When investors think about how to profit from periods of rising inflation, my suspicion is that asset types such as gold, other commodities, and rising rate bond funds are central to the research discussion. But there is an ETF that I find quite intriguing, perhaps as a complement to those traditional inflation-fighters, that exclusively uses equity securities to pursue that objective. The Horizon Kinetics Inflation Beneficiaries ETF (INFL) uses a rules-based methodology to identify companies that are well-positioned to benefit from inflation, which can provide investors with a systematic approach to investing in this specific type of market.

Overall, INFL offers investors a unique opportunity to invest in companies that have the potential to benefit from inflation, which can be an important consideration for those concerned about the potential negative effects of inflation on their portfolios. This ETF performed well at a time when world was shut down and the market didn't perform very well. It posted a positive return in 2022, when many investors would have been satisfied to "only" lose 10%.

Inflation spiked during 2022 as the Fed raised rates multiple times. That has continued into this year. And, while we might be entering the phase of the market cycle where inflation moderates, it's still likely to settle in at a much higher sustainable rate than this generation of investors has seen. Even 3%-5% inflation is a shock to the economic system, if it doesn't quickly go away. That leaves INFL in a position to be at least a thematic side holding in a portfolio, and perhaps even a core holding for a while. I rate this ETF a hold for now.

Strategy

Inflation can have a significant impact on businesses in many economic sectors, as it can increase production costs, reduce demand, and make it harder for companies to invest in growth. INFL invests in companies that are expected to benefit from inflation. The fund's holdings consist of a diverse group of stocks, primarily across three sectors: energy, materials, and financials. INFL's approach is based on the idea that during periods of inflation, companies with hard assets, pricing power, and the ability to pass on price increases to customers tend to perform well.

ETF Grades

• Offense/Defense: Offense

• Segment: Thematic

• Sub-Segment: Inflation-Equity

Technical Ratings

• Short-Term (next 3 months): F

• Long-Term (next 12 months): F

Rating scale: A = Excellent, B = Good, C = Fair, D = Weak, F = Poor. For a detailed description of MII's proprietary technical rating system, see disclosures at bottom of this article.

Holding Analysis

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.

Basic materials, energy, and financial stocks each make up about 25% of INFL, and another 10% is allocated to consumer defensive equities. 82% of assets are in the top 25 holdings. There are 22 additional holdings currently (47 in total), but they only make up 18% between them. Thus, the top 25 are essentially what drives INFL's performance.

Strengths

What is most unique about INFL is that it is one of a small number of ETFs that aim to specifically serve as an inflation-fighter, but using equities. Investors can isolate in a sector or in non-equity asset classes to try to combat inflation, the top investment return hurdle of our time. However, INFL blends several of them together under one ETF roof. There is commodity exposure through commodity stocks, but also plenty of exposure to companies in other sectors that have historically been more inflation-resistant than most.

As the chart below shows, INFL has stood up well vs. gold, both in times when gold was rising in price, as well as when gold was weak but the broad stock market was rallying. This is based on a small sample size of just two years, but it shows the potential for INFL to provide the best of both worlds: inflation hedge and equity market alpha.

Weaknesses

INFL's potential benefits of concentration in the three sectors noted above will naturally backfire when those market segments fall. However, this should be expected with a thematic ETF like INFL, which takes on the narrow mission to deliver an inflation-resistant equity portfolio. This is also a fairly new ETF, having traded only since Jan. 11, 2021. It passed the single greatest test for a fund of its type that investors have seen in about 50 years: a true inflation spike in 2022. However, just because it survived the storm of the half-century, that doesn't mean it will consistently deliver in future inflationary periods.

Opportunities

According to Horizon Kinetics' letter to shareholders in February 2023:

... the energy sector continues to trade at amongst the lowest valuations of all hard asset sub-industries in our universe, assuming mid-cycle oil and gas pricing. The fact that we believe energy prices have amongst the highest potential to structurally rerate higher relative to historic mid-cycle pricing leads to our overweighting in energy companies.

That is part of a valuation story with INFL, as its portfolio trades at only 13.5x training earnings and has 20% forecast revenue growth. That's a favorable combination.

Threats

INFL's returns are tied to inflation expectations. If inflation does not materialize or is lower than expected, the ETF's returns might be lower than anticipated. In addition, as market preferences change over time, it is possible that the "big three" sectors that make up about three-fourths of the total assets of this fund might be less recession-resistant than they have been in the recent past.

Conclusions

ETF Quality Opinion

Investing in INFL can be a way for investors to protect their portfolios against the negative effects of inflation, while also potentially benefiting from companies that are well-positioned to profit from rising prices. To me, this is a clear case of something I want to own at a more reasonable price.

ETF Investment Opinion

However, with INFL trading in a stubborn range from about $30-$33 since last November, I'd prefer to see more of a bottoming formation at the lower end of that range or a true breakout to new high ground. I think one of those scenarios is just a matter of time. But, for now, I rate INFL a hold.

Modern Income Investor's proprietary technical rating system was created by the firm's founder, Rob Isbitts, a chartist for more than 40 years. The ratings emphasize risk-management, and the belief that while any investment can appreciate in price at any time, each investment carries a different level of potential for major loss. The balance of reward and risk is calculated each night for thousands of securities, using a formula that analyzes price trend, strength of that trend and key price levels. It analyzes data over multiple time frames to produce a short-term rating (looking 3 months out) and a long-term rating (looking 12 months out).

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