First Trust ETF Covers ‘Inflation Sensitive’ Equities

The fund tracks an index that targets sectors that perform well in inflationary periods.

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Reviewed by: Heather Bell
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Edited by: Heather Bell

On Tuesday, First Trust rolled out an ETF that invests in equities drawn from sectors that outperform during inflationary periods. The First Trust Bloomberg Inflation Sensitive Equity ETF (FTIF) tracks a Bloomberg index that draws its holdings from the energy, industrials, materials and real estate sectors.  

The fund had an expense ratio of 0.60% and lists on the NYSE Arca. 

FTIF’s underlying index methodology starts with U.S.-listed companies and removes the companies with the lowest debt-to-market-capitalization ratios from each sector. From there it ranks the eligible companies by high beta to two-year inflation breakeven and by high beta to Bloomberg Commodity Index, keeping the top 50% of companies in each sector in the selection universe. Ultimately, the index selects the 50 companies with the highest trailing 12-month free-cash-flow yield, capping each sector at 20 stocks before equal weighting the final list, according to the First Trust website. 

A Field of Competitors 

At least three inflation-focused equity ETFs have launched in the past few years even as the consumer price index spiked to levels not seen in decades.  

The largest is the actively managed $1.2 billion Horizon Kinetics Inflation Beneficiaries ETF (INFL), which has a global focus and debuted in 2021. The passively managed $188.4 million Fidelity Stocks for Inflation ETF (FCPI) launched in 2019. There’s also the $25 million Avantis Inflation Focused Equity ETF (AVIE), which rolled out in September 2022. There are even more funds that target inflation via other asset classes such as commodities or fixed income or a combination of asset classes.  

Last year, both INFL and FCPI outperformed relative to their broad markets, delivering less damaging returns even as inflation rose above 9%. For example, INFL was up 2.64%, according to Morningstar, while the iShares MSCI ACWI ETF (ACWI) was down more than 18%. Similarly, FCPI was down roughly 7%, while the Vanguard Total Stock Market ETF (VTI) fell nearly 20%. This year, both funds are underperforming their broad market counterparts and have seen outflows, while AVIE has seen minimal inflows. 

FTIF’s top holdings include Reliance Steel & Aluminum Co., 2.6%; Steel Dynamics Inc., 2.5%; Cleveland-Cliffs Inc., 2.5%. There is very little to no overlap with the top 10 holdings of INFL, FCPI and AVIE, except FCPI and FTIF include Steel Dynamics Inc. and Nucor Corp. in their top stocks.  

With just 50 stocks in its portfolio, FTIF has a more concentrated portfolio than either FCPI, which tracks about 100 stocks, or AVIE, which owns 350 securities. INFL has an even more concentrated portfolio, with just 44 stocks.  

Should inflation persist or intensify, these funds will likely see more investor interest. Indeed, research published last year by Rob Arnott and Omid Shakernia of Research Affiliates suggests that getting inflation back down to 3% after it rises above 8% could take six to 20 years, so they will likely see continued or increased relevance going forward. 

 

Contact Heather Bell at [email protected] 

Heather Bell is a former managing editor of etf.com. She has also held editorial positions at Dow Jones Indexes and Lehman Brothers. Bell is a graduate of Dartmouth college and resides in the Denver area with her two dogs.