INFL - INFL: Will Likely Continue To Benefit From High Inflation
Summary
- We expect inflation will not return quickly to the 2% Fed-target.
- The Horizon Kinetics Inflation Beneficiaries ETF focuses on stocks that thrive when inflation is high.
- The fund just celebrated its second birthday and so far lived up to its promises: positive real returns.
- We believe it will continue to do so in this higher for longer inflation environment.
Inflation is here to stay. It will probably cool, but we will not return quickly to the 2% Fed-target. De-globalization, de-carbonisation, 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. A logical solution could be to go short the 60/40 portfolio, but this is of course risky.
Another solution is to look for equities who can outperform in an inflationary environment. We already discussed, e.g., the Fidelity Stocks for Inflation ETF ( FCPI ). Today, we discuss an equity ETF we like even more: the Horizon Kinetics Inflation Beneficiaries ETF ( INFL ).
Inflation hedges in theory
The best Inflation hedging asset classes are well-known: commodities TIPS, and real estate.
Figure 1: Inflation Beta (PIMCO)
Sometimes equities are also seen as an inflation hedge. Research by Vanguard shows that equities can indeed hedge to (unexpected) inflation, albeit to a lesser extent compared to commodities, TIPS, and REITs.
Figure 2: Correlation to unexpected inflation (Vanguard)
Inflation hedges in practice
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.
Figure 3: Total Return Chart (Yahoo! Finance, Author)
Let's take a look at some other ETFs that could perform well in an inflationary environment, like the Fidelity Stocks for Inflation ETF, the Horizon Kinetics Inflation Beneficiaries ETF, SPDR SSGA Multi-Asset Real Return ETF ( RLY ) and KFA Mount Lucas Index Strategy ( KMLM ).
Figure 4: Total Return Chart (Yahoo! Finance, Author)
We already discussed in previous articles the nice performance of managed futures ETFs, who are even outperforming commodities. All the ETFs in Figure 4 are outperforming the S&P 500, but TIP and FCPI have negative total returns. INFL is despite being an equity ETF and given the bad performance of stocks in general posting a positive total return over the past 12 months! When we look at the performance since inflation took off in the second quarter of 2021, commodities are the top performer. Equities and TIPS performed worst.
Figure 5: Total Return Chart (Yahoo! Finance, Author)
The performance of inflation hedges like the RLY, FCPI, KMLM, and INFL is very nice: they all outperform inflation and have hence positive real returns (adjusted for inflation).
The only ETF that is in a clear long-term uptrend is, however, INFL!
Figure 6: Trends (Yahoo! Finance, Author)
Horizon Kinetics Inflation Beneficiaries ETF
The Horizon Kinetics Inflation Beneficiaries ETF is an actively managed ETF that seeks long-term growth of capital in real (inflation-adjusted) terms. The ETF was launched on January 12th, 2021 and has an expense ratio of 0.85%.
INFL invests in domestic and foreign companies that are expected to benefit from rising prices of real assets. The managers focus on what they call "capital light companies": companies whose revenues are expected to increase with inflation without corresponding increases in expenses. This translates into higher margins in inflationary times.
We are talking about, for e.g.:
- Transaction Facilitators (financial exchanges and brokerage firms),
- Royalty & Streaming Companies (in energy, base metal, and precious metal markets),
- Data & Research Companies (in the health care, insurance, energy, metals & mining, automotive and industrial industries),
- Timber companies,
- Agriculture (e.g., Grain or seed processing companies) and
- Real Estate and Infrastructure Managers
Figure 7: Top 10 holdings (Horizon Kinetics)
Valuation
The "capital light companies" in INFL have indeed higher margins than e.g. the S&P 500 and at the same time they are cheaper and less leveraged.
INFL has a P/E of 14 vs. 19 for the S&P 500.
Figure 8: Valuation (Horizon Kinetics)
The current dividend yield is 1.6%, in line with the S&P 500.
Conclusion
Equities are considered to be an inflation hedge, albeit to a lesser extent than commodities, TIPS, and real estate. The Horizon Kinetics Inflation Beneficiaries ETF focuses on stocks that thrive when inflation is high.
In this inflationary environment, it is outperforming the S&P 500. We expect that inflation will not return quickly to the 2% Fed-target. This is a strong tailwind for INFL.
On top of that, we have a valuation that is rather low, given the high margins, and the ETF is in a clear long-term uptrend.
We expect INFL not only to continue to outperform but also to continue to post positive real returns: buy the Horizon Kinetics Inflation Beneficiaries ETF.
For further details see:
INFL: Will Likely Continue To Benefit From High Inflation