Inflation-Focused ETFs Struggle to Gather Assets

Cinthia Murphy, director of research for ETF Think Tank and an etf.com alum, joined this week’s ETF Working Lunch podcast to talk about inflation ETFs, and why they’re not catching on as much as one would expect in the current economic environment.  

She recently took a deep dive into the topic in an article she wrote for her firm’s website, Inflation, ETFs & Advisor Wisdom, in which she highlighted the largest inflation-focused ETFs investing in equities, fixed income, commodities and multiple other asset classes. 

Murphy notes that there seems to be a disconnect in the ETF industry. While all signs point to the fact that inflation is top of mind for investors and a significant number of inflation-focused ETFs have come to market in the last year or so, those products have not seen inflows that are commensurate with the level of concern about inflation.  

“The ETF industry went all out there and tried to provide all these new products to help investors navigate this high inflationary environment we've had,” she said. “It's also interesting to see that asset gathering in that space has been so incredibly slow.”  

Murphy’s article on the topic cited a Bank of America research note that asserted that once a developed economy sees its inflation rise above 5%, it will take another decade for it to get back to 2%.  

“I think that Bank of America note really put in perspective the fact that maybe [inflation has] peaked, maybe it's not going higher, but that doesn't mean it's going away,” she added. “And what does it mean to invest in a period of sticky inflation—higher for longer inflation. [From] that perspective, I think there's still an opportunity here for a lot of these inflation-specific ETFs.” 

Why the Struggle? 

Among the funds listed in Murphy’s article was the $1.2 billion Horizon Kinetics Inflation Beneficiaries ETF (INFL), which is the largest inflation-focused ETF and is one of the few exceptions to this asset drought. She notes that the fund was among the first to market covering inflation-resistant equities.  

“Sometimes [that’s] all it takes—you capture that initial appetite for this kind of thematic reach,” she noted. “It's really difficult as a provider to capture a theme at the right time at the right place.” 

Murphy also allows for the possibility that investors were already implementing their own counter-inflation strategies by targeting different types of equites and fixed income, like investing in dividend-paying stocks or floating-rate bonds.  

“I think it's fascinating, because I would have thought these funds would have had an easy time gathering assets. That's all we talked about—inflation and rising rates—and there's a lot of great inflation ETFs, a lot of great interest-rate-hedging ETFs,” she explained. “I’m curious to see if they'll have a second leg of asset gathering.”  

Murphy concedes that the majority of such funds have not had “stellar” performance, but notes that they are less designed for outperformance and more to provide diversification. Another issue is that only a few ETFs targeting inflation have hit that three-year mark that is so important to investors relying on Morningstar rating; plus, many of these funds remain fairly small, a further obstacle. 

She further points out that there’s a sentiment that investors have stopped “fighting the Fed” and accepted that it will continue to raise rates rather than pause or halt hikes.  

“The Fed is going to do what he has to do, no matter how much pain it inflicts, and the market is finally realizing that,” Murphy said. “So if you assume for a second that that's true, it will be interesting to see what that means in terms of ETF flows, where the money gets reallocated.”  

Contact Heather Bell at [email protected]