This ETF Benefits From Inflation

September 08, 2021

Key Takeaways

  • Ten ETFs that launched in 2021 have gathered more than $7 billion combined year-to-date, supporting CFRA’s view that investors are not reliant on a three-year track record to assess a fund’s merits.
  • The Horizon Kinetics Inflation Beneficiaries ETF (INFL) launched in January and was approaching $700 million in assets without the benefit of initial institutional investors at the end of August.
  • The ETF owns capital-light companies such as Archer-Daniels-Midland (ADM) and Wheaton Precious Metals (WPM) that management thinks can grow revenues during rising inflation without a similar increase in expenses.

Fundamental Context

Investors are not waiting three years before buying a new ETF. In the first eight months of 2021, U.S.-listed ETFs gathered approximately $600 billion in assets, according to CFRA data.

While most of the money has moved into well-established products like the Vanguard Total Stock Market Index ETF (VTI) and the iShares Core S&P 500 ETF (IVV), many products that began trading as new offerings this year have also been popular.

Indeed, excluding funds from Dimensional that converted to ETFs from preexisting mutual funds, 10 new ETFs alone gathered a combined $7.5 billion.

Unlike with a mutual fund, investors can easily look at the securities inside most new ETFs the first day of trading to understand the exposure the fund provides rather than wait to see how it performs over the long term. CFRA provided ratings on just over 2,000 equity and fixed income ETFs at the end of August, with one-third of them sporting less than a three-year track record.

 

Largest Net Inflows For ETFs Launched In 2021

Fund Ticker Asset Manager Launch Date AUM ($M)
Vanguard Ultra-Short Bond ETF VUSB Vanguard April 2021 1,511
BlackRock U.S. Carbon Transition Readiness ETF LCTU BlackRock April 2021 1,468
Invesco S&P 500 QVM Multi-Factor ETF QVML Invesco June 2021 793
Horizon Kinetics Inflation Beneficiaries ETF INFL Horizon Kinetics January 2021 676
BlackRock World ex U.S. Carbon Transition Readiness ETF LCTD BlackRock April 2021 613
ARK Space Exploration & Innovation ETF ARKX ARK Funds April 2021 608
iShares Gold Trust Micro IAUM BlackRock June 2021 595
JPMorgan ActiveBuilders Emerging Markets Equity ETF JEMA JPMorgan March 2021 323
Cabana Target Leading Sector Moderate ETF CLSM Cabana ETF July 2021 240
VanEck Social Sentiment ETF BUZZ VanEck March 2021 223
Total       7,051

Source: CFRA ETF Database as of 8/31/2021. Excludes Dimensional Funds that were converted from existing mutual funds.

 

New entrant Horizon Kinetics garnered attention alongside the top providers. ETFs from three of the four largest ETF firms—the BlackRock U.S. Carbon Transition Readiness ETF (LCTU), the Invesco S&P 500 QVM Multi-Factor ETF (QVML) and the Vanguard Ultra-Short Bond ETF (VUSB)—are at the top of the leaderboard for most successful new ETFs thus far in 2021.

While VUSB’s assets climbed steadily throughout 2021, likely aided by Vanguard’s strong ETF presence, LCTU and QVML were jump-started with significant investments by anchor institutional clients on the first day of trading.

About INFL

In contrast, Horizon Kinetics’ $676 million INFL, which gathered $130 million between June and August after gathering more than $500 million as of the end of May, remains the firm’s lone ETF offering.

INFL has also gained more assets than the ARK Space Exploration & Innovation ETF (ARKX) and the VanEck Social Sentiment ETF (BUZZ), both of which launched with greater media presence.

INFL offers a unique, compelling twist on dealing with inflation. As inflation in the U.S. has climbed higher in 2021, investors have gravitated to inflation-protected fixed income ETFs. Indeed, led by the iShares TIPS Bond ETF (TIP) and the Vanguard Short-Term Inflation-Protected Securities ETF (VTIP), the subcategory gathered $25 billion of net inflows in the first eight months of 2021.

Yet James Davolos, portfolio manager of INFL, explained to CFRA in an exclusive interview that with interest rates currently so low and a flat yield curve, the best-case scenario for these fixed income instruments is that the securities preserve capital while everything is collapsing.

Instead, INFL holds shares of global companies that have exposure to hard assets in inflationary end markets with capital-light business models.

According to Davolos, these companies do not need to spend a lot of money to earn their returns, providing them with operating leverage and eliminating the need to make a directional bet on inflation.

While he thinks inflation is going to be structural and not transitory, Davolos noted that the fund has exposure to companies in the agriculture, brokerage, gold and health care industries, which have already reset at higher levels of pricing in 2021.

The ETF’s largest holdings include ADM, Charles River Laboratories (CRL), Marsh & McLennan (MMC) and WPM. While INFL is actively managed, turnover in the fund’s first year has been relatively low.

 

(Use our stock finder tool to find an ETF’s allocation to a certain stock.)

 

Conclusion

CFRA has a four-star rating on INFL, believing it has high reward potential in addition to relatively limited risks.

Like INFL investors, we do not think a three-year track record is necessary to assess the fund.

All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of the analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. For more information and disclosures, please refer to CFRA's Legal Notice at https://www.cfraresearch.com/legal/.

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