INFL: Not The Best Inflation-Focused ETF (NYSEARCA:INFL)

CharlieAJA INFL Strategy Horizon Kinetics Inflation Beneficiaries ETF (NYSEARCA:INFL) is an actively managed ETF investing in domestic and foreign companies expected to benefit from rising prices of real assets. It was launched on 1/11/2021 and has a portfolio of 44 stocks, a 30-day SEC yield of 1.39% and an expense ratio of 0.85%. Distributions are paid quarterly. As described in the prospectus by Horizon Kinetics, The Adviser seeks to identify companies that it believes are positioned to benefit from inflationary pressures, such as companies whose revenues are expected to increase with rising consumer, producer, raw material, or assets prices without a corresponding increase in expenses. Such companies may include, for example, exploration and production companies, mining companies, transportation companies, infrastructure, and real estate companies, with an emphasis on “asset light” businesses with royalty, streaming, rental, brokerage, management, and leasing exposure (…) This may include companies with indirect exposure to inflation drivers, such as financial exchanges that facilitate transactions in commodity, interest rate, and currency instruments, as well as data providers that specialize in data and analytics in industries that are sensitive to movements in interest rates and consumer prices. Companies fitting in this description are selected based on fundamental analysis. The portfolio turnover rate in the most recent fiscal year was 10%. Portfolio The portfolio is mostly invested in the U.S. and Canada, which represent about 48% and 35% of asset value, respectively. Other countries are below 5%. All size segments are represented: large caps (41.3%), mid-caps (36.5%), and small/micro caps (22.2%). Geographical allocation (Chart: author; data: Fidelity) INFL is overweight in energy (30.7% of asset value), and heavy in materials (26%) and financials (23%). Other sectors are below 8% individually and 17% in aggregate. The oil, gas, and fuel industry counts for all the energy sector allocations. The second-heaviest industry is metals and mining (21.8%), followed by capital markets (19.2%). Sector breakdown (Chart: author; data: Fidelity) The portfolio is quite concentrated: the top 10 holdings, listed in the next table, represent 48.5% of assets. The four heaviest positions are over 5%. Risks related to other individual companies are low to moderate. Name Ticker Weight Texas Pacific Land Corporation TPL 7.66% PrairieSky Royalty Ltd PSK CN 6.09% Viper Energy, Inc. VNOM 5.93% Wheaton Precious Metals Corp. WPM 5.92% Intercontinental Exchange, Inc. ICE 4.56% Marsh & McLennan Companies, Inc. MMC 3.88% Franco-Nevada Corporation FNV 3.77% US BANK MMDA – USBGFS 7 06/01/2031 USBGFS7 3.64% Glencore PLC GLEN LN 3.58% Click to enlarge Fundamentals Based on valuation ratios, INFL is significantly cheaper than the S&P 500 (SP500), represented in the next table by SPDR® S&P 500 ETF Trust (SPY). Growth rates are mixed: earnings growth and sales growth are close to the benchmark, while cash flow growth is materially lower (and negative). Based on these metrics, INFL may be classified in the value fund category. INFL SPY P/E TTM 19.86 25.7 Price/Book 2.69 4.46 Price/Sales 1.78 2.91 Price/Cash Flow 9.65 17.49 Earnings growth 23.42% 22.84% Sales growth 7.38% 8.81% Cash flow growth -1.96% 8.95% Click to enlarge Data source: Fidelity. Historical performance Since its inception in January 2021, INFL has underperformed SPY by 13.5% in total return. It was on par with the benchmark in 2021 and outperformed it in 2022 before going sideways in 2023. INFL vs. SPY since 1/12/2021 (Seeking Alpha) In 2024 to date, INFL is lagging by 9.5%: INFL vs. SPY, year-to-date (Seeking Alpha) As inflation went down in 2023, it makes sense that INFL started underperforming last year. Nonetheless, its track record is too short to assess the long-term potential of the strategy. Year 2020 2021 2022 2023 Inflation 1.40% 7.00% 6.50% 3.40% Click to enlarge Competitors The next table compares the characteristics of INFL and two equity ETFs specifically designed for an inflationary environment: Fidelity Stocks for Inflation ETF (FCPI). Fidelity Dividend ETF For Rising Rates (FDRR). INFL FCPI FDRR Inception 1/11/2021 11/5/2019 9/12/2016 Expense Ratio 0.85% 0.15% 0.15% AUM $707.57M $166.46M $544.21M Click to enlarge INFL is the newest, although the largest, of those funds (measured in assets under management). Its expense ratio is much higher. The next chart plots total returns since its inception. INFL is lagging behind its peers and FCPI is the best performer by a wide margin. INFL vs. FCPI, FDRR since 1/12/2021 (Seeking Alpha) In 2024 to date, INFL is lagging FDRR and FCPI by 10% and 17%, respectively. INFL vs. FCPI, FDRR, year-to-date (Seeking Alpha) Takeaway Horizon Kinetics Inflation Beneficiaries ETF (INFL) holds 44 domestic and foreign companies expected to benefit from rising prices. INFL is mostly invested in the U.S. and Canada with a focus on energy, materials, and financials, and it shows value characteristics. It outperformed the S&P 500 in 2021-2022, then started lagging as inflation cooled down. Since its inception, it has significantly underperformed another ETF designed for inflation: FCPI. INFL history is too short to assess the strategy, but for now, it doesn’t justify the higher expense ratio.

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