Asset-Light ETF Takes Novel Approach to Inflation Protection

The Horizon Kinetics Inflation Beneficiaries ETF (INFL) has grown to nearly $1.1 billion in assets by taking an unconventional approach to inflation protection, focusing on asset-light companies that can benefit from rising prices while avoiding the capital intensity and cost pressures faced by traditional resource companies.

At a time when economists say Trump’s planned tariffs would drive inflation higher and the Federal Reserve contemplates more rate cuts, INFL’s approach offers investors a different way to position for sustained elevated inflation without the risks associated with traditional inflation hedges like TIPS or commodity funds.  

According to James Davolos, lead portfolio manager of INFL at Horizon Kinetics, rather than investing in conventional hard assets like commodity producers or REITs, the fund targets royalty companies and exchanges that collect revenue from resource production without exposure to operating expenses. This strategy has helped INFL outperform the S&P 500 since its Jan. 2021 launch.

“If you own capital light businesses with very high profit margins, limited capital intensity, minimal external financing needs, that is a precondition for a business model that can withstand a variety of economic conditions,” Davolos told etf.com.

Inflation Strategy Build for Current Environment

To illustrate how the strategy works, Davolos used an example of a West Texas ranch with oil deposits.

While an oil operator might spend $70,000 per acre up front plus millions in drilling and operating costs, the landowner simply collects about 15% of oil production revenue through royalties, Davolos explained. The landowner avoids exposure to rising costs and maintains high profit margins even if oil prices fluctuate.

The fund’s approach is particularly relevant as Davolos expects inflation to remain elevated between 2.5% to 4% over the next 12 to 24 months, noting that potential Trump administration policies like increased tariffs could benefit holdings that focus on finite resources.

According to the fund fact sheet, top holdings include Texas Pacific Land Corp and various royalty companies in the energy and precious metals sectors. Davolos explained these firms can benefit from both rising commodity prices and increased production levels while maintaining relatively fixed costs. 

“TIPS and inflation protection doesn't really do much for you in a world of three, four, five percent inflation,” Davolos said. “What does really well for you are the businesses that can compound under that moderately elevated inflation.”

Davolos noted that rather than positioning INFL purely as inflation protection, he has been “pretty deliberate” in positioning it as a real asset strategy that can compound returns in moderately elevated inflation environments.

“Any added trade protectionism that limits the supply of all of these raw materials is going to orient itself very favorably for the fund,” Davolos said.