Inflation has always been a concern for investors, and with recent economic uncertainties, finding investment opportunities that can withstand a challenging macro backdrop is crucial. To learn about an actively managed exchange-traded fund (ETF) that is designed to provide positive real investment returns in an inflationary environment, Wealth Advisor Managing Editor Scott Martin tapped James Davolos, a Portfolio Manager at Horizon Kinetics, to discuss the Inflation Beneficiaries ETF (NYSE: INFL).
Davolos explains how INFL aims to provide long-term compounding returns by investing in cyclical industries and businesses that can outperform inflation while minimizing risk exposure. Unlike Treasury inflation-protected securities (TIPS), INFL aims to earn a minimum equity risk premium above and beyond inflation.
The fund’s focus is on high-quality equities of businesses with capital-light models. These companies have high operating margins, minimal balance sheet intensity, and scalability, making them resilient in the face of rising costs. These businesses can generate sustainable cash flow and attractive valuations by benefiting from revenue and price without significant exposure to expenses and reinvestment.
Davolos also notes that the companies INFL invests in become more defensive thanks to their capital-light business models. This defensiveness acts as a bulwark, driving capital into these companies. Additionally, the INFL companies have sustainable competitive advantages, high cash flow generation, and attractive valuations.
Although the fund provides exposure to sectors such as energy, metals, land, agriculture, and infrastructure, it focuses on niche businesses within these sectors rather than mega-cap names sparsely populated in the index. This approach underpins the fund’s core holding potential in an investor’s portfolio, offering exposure to essential sectors through a meticulously curated selection of companies.
The investment process for INFL is labor-intensive and relies heavily on good old-fashioned research, Davolos says. The companies are not easily screenable for inclusion or exclusion, requiring a deep understanding of each business and its true sustainable cash flow generation.
The team at Horizon Kinetics conducts extensive due diligence, digging through various sources to identify companies with strong fundamentals and growth potential. This process allows them to uncover hidden gems while avoiding potential time bombs. This hands-on approach to portfolio construction enables them to avoid overcrowded names and discover untapped value.
Davolos emphasizes the importance of active management in today’s market, where many managers fear underperforming the benchmark and crowd into the same names. INFL stands out with an active share of more than 90%, indicating a high level of differentiation from the benchmark. This differentiation is a byproduct of Horizon Kinetics’ rigorous research process and commitment to finding unique investment opportunities that can outperform inflation.
Looking ahead, Davolos believes that the Federal Reserve’s recent acknowledgment of not reaching the 2% inflation target before cutting rates suggests it is prioritizing employment and financial stability over inflation control. If inflation “is the squeaky wheel,” he says, the Fed seems willing to “let it squeak.” Davolos advises that navigating the transition from a rate-hiking cycle to a lower growth rate in the global economy will be a tricky process, and only time will tell how it unfolds.
With this uncertainty in mind, advisors and broker-dealers should be aware of investment solutions that can provide long-term compounding returns while minimizing risk exposure. INFL, the Horizon Kinetics Inflation Beneficiaries ETF, offers a unique approach to investing in high-quality equities of businesses with capital-light models. By focusing on niche businesses within cyclical industries, INFL aims to outperform inflation and provide attractive valuations.
The fund’s active management approach and rigorous research process differentiate it from passive strategies, offering advisors and broker-dealers an opportunity to diversify their clients’ portfolios and potentially generate superior returns. As the market evolves, staying informed about innovative investment solutions such as INFL becomes increasingly important.
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Additional Reading
- Royalties as an Asset Class
- Inflation Beneficiaries ETF Factsheet
- Inflation Beneficiaries ETF Overview
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Disclosures
Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a statutory and summary prospectus by contacting 646-495-7333. Read it carefully before investing.
Past performance is not a guarantee of future returns, and you may lose money. Opinions and estimates offered constitute our judgment as of the date made and are subject to change without notice. This information should not be used as a general guide to investing or as a source of any specific investment recommendations.
The Horizon Kinetics Inflation Beneficiaries ETF (Symbol: INFL) is an exchange-traded fund (“ETF”) managed by Horizon Kinetics Asset Management LLC (“HKAM”). HKAM is an investment adviser registered with the
U.S. Securities and Exchange Commission. You may obtain additional information about HKAM at our website at www.horizonkinetics.com.
Investing involves risk, including the possible loss of principal. Shares of any ETF are bought and sold at market price (not NAV), may trade at a discount or premium to NAV and are not individually redeemed from the Fund. Brokerage commissions will reduce returns. The Fund’s investments in securities linked to real assets involve significant risks, including financial, operating, and competitive risks. Investments in securities linked to real assets expose the Fund to potentially adverse macroeconomic conditions, such as a rise in interest rates or a downturn in the economy in which the asset is located.
The Fund is non‐diversified, meaning it may concentrate its assets in fewer individual holdings than a diversified fund. Therefore, the Fund is more exposed to individual stock volatility than a diversified fund. The Fund invests in foreign securities which involve greater volatility and political, economic and currency risks and differences in accounting methods. These risks are greater for investments in emerging markets. The S&P 500 Index is a broad-based index intended to show the performance of the 500 largest companies listed on stock exchanges in the United States.
The Fund may invest in the securities of smaller and mid‐capitalization companies, which may be more volatile than funds that invest in larger, more established companies. The fund is actively managed and may be affected by the investment adviser’s security selections. Diversification does not assure a profit or protect against a loss in a declining market.
HKAM does not provide tax or legal advice, all investors are encouraged to consult their tax and legal advisors regarding an investment in the Fund. No part of this material may be copied, photocopied, or duplicated in any form, by any means, or redistributed without the express written consent of HKAM.
The Horizon Kinetics Inflation Beneficiaries ETF (INFL) is distributed by Foreside Fund Services, LLC (“Foreside”). Foreside is not affiliated with Horizon Kinetics LLC, HKAM, or their affiliates or subsidiaries. Returns are subject to change. Note that indices are unmanaged, and the figures shown herein do not reflect any investment management fee or transaction costs. Investors cannot directly invest in an index. References to market indices, benchmarks or other measures of relative market performance (a “Benchmark”) over a specific period are provided for your information only. It is not our intention to state, indicate or imply in any manner that our future results will be profitable or equal past results.
Murray Stahl is a member of the Board of Directors of Texas Pacific Land Corporation (“TPL”), a large holding in certain client accounts and funds managed by Horizon Kinetics Asset Management LLC (“HKAM”). Officers, directors and employees may also hold substantial amounts of TPL, both directly and indirectly, in their personal accounts. HKAM seeks to address potential conflicts of interest through the adoption of various policies and procedures, which include both electronic and physical safeguards. All personal and proprietary trading is also subject to HKAM’s Code of Ethics and is monitored by the firm’s Legal and Compliance Department.
