Market conditions are constantly changing, putting financial advisors on the lookout for innovative investment strategies that offer protection against volatility. One of the standout offerings among exchange-traded funds (ETFs) is the Horizon Kinetics Inflation Beneficiaries ETF (NYSE: INFL). This fund takes a unique approach to managing inflationary pressures and market cycles.
In a recent conversation with Wealth Advisor Managing Editor Scott Martin, Horizon Kinetics Portfolio Manager James Davolos provided an in-depth look at the INFL ETF, its performance, strategy, and why it might be a compelling option for those seeking to navigate the complexities of inflation and shifting business environments.
Horizon Kinetics launched its Inflation Beneficiaries ETF in 2021. The fund is designed to provide investors with a hedge against inflation by investing in companies that benefit from rising prices. Unlike traditional inflation-linked securities, such as Treasury Inflation-Protected Securities (TIPS), INFL takes a broader approach by investing in capital-light businesses in sectors such as energy, materials, agriculture, real estate, and infrastructure.
INFL is not just about inflation protection, however. The fund is built for all market conditions, offering investors a way to participate in various economic environments. Whether inflation is rising, stable, or even declining, this ETF is constructed to perform well across different scenarios.
Davolos emphasizes the importance of investing in high-quality, durable companies that can withstand diverse market conditions. By focusing on capital-light businesses, the fund avoids the pitfalls of capital-intensive industries that may struggle during economic downturns. This approach makes INFL a potentially attractive option for investors looking for a robust investment strategy that aims to withstand the test of time.
The launch of INFL coincided with a period of significant economic upheaval, following a decade characterized by moderate growth, notably low interest rates, and effectively no inflation. Over the past three and a half years, the global economy has experienced rapid shifts resulting from such factors as the COVID-19 pandemic, government spending, shifting monetary policies, and fiscal deficits. Despite these challenges, INFL has demonstrated impressive performance, proving its resilience and adaptability.
Davolos describes this period as a “proof of concept” for INFL. The fund has successfully navigated through a full market cycle compressed within just a few years, participating in market gains during the early stages of inflation and protecting against losses during downturns. This track record of success highlights the fund’s ability to outperform across market conditions.
Inflation has been a central concern for advisors, and the question of whether current levels are the “new normal” is top of mind for many advisors. Davolos believes that the new normal will likely involve elevated inflation levels, albeit not as extreme as past episodes.
On the policy front, Davalos encourages advisors to consider the “greater good” in the Federal Reserve’s mandate to pursue both price stability and maximum employment. Fed Chairman Jerome Powell’s recent statements suggest a willingness to tolerate inflation levels slightly above the 2% target to maintain full employment.
This approach aligns with the INFL strategy, which can thrive in an environment of elevated inflation, moderate growth, and high nominal returns.
Horizon Kinetics has been investing in capital-light hard asset companies for more than 30 years. The INFL ETF’s success can be attributed to the firm’s rigorous, proprietary research-driven methodology, which identifies businesses capable of growing revenue without increasing expenses proportionately.
This independent research focuses on companies such as royalty firms, land companies, brokerages, and exchanges. Davolos highlights the importance of finding businesses with the ability to grow revenues without corresponding increases in expenses. This approach ensures that the portfolio is composed of companies capable of improving margins and delivering consistent returns and can capitalize on opportunities in various sectors while minimizing risk exposure.
INFL offers a unique value proposition for investors looking to diversify their portfolios. With a focus on small to mid-cap companies and a strong value bias, the fund provides exposure to real assets without the typical capital intensity and interest rate sensitivity.
As markets continue to evolve, the importance of diversification becomes increasingly apparent. INFL provides advisors with a way to diversify their clients’ portfolios beyond traditional index constructs, offering a distinct alternative to mega-cap growth stocks.
The historical performance of the INFL ETF is a testament to its strategic approach. In 2021, the fund matched the broader market’s returns, outperforming most real asset benchmarks. In 2022, as the market faced challenges from rising interest rates and inflation concerns, INFL preserved its value, even posting gains while other assets saw significant declines.
This ability to perform well during market downturns and compound gains during upswings sets INFL apart from other investment options. Advisors can have confidence in the fund’s ability to navigate various market conditions while providing consistent returns.
INFL also offers an attractive yield component, with a trailing yield of approximately 2.5% to 3%. The fund’s yield is variable, reflecting the underlying asset prices and volumes. This structure allows investors to benefit from rising asset values and ensures that the yield can remain competitive in different economic environments.
For advisors seeking income-generating investments, INFL presents a compelling option. The variable yield provides flexibility and aligns with the fund’s overall strategy of capitalizing on inflation and asset price growth.
Davolos identifies a variety of use cases in which INFL presents advisors with a versatile investment tool to meet client needs. Potential applications include:
- Core Portfolio Allocation: INFL can serve as a core holding in a diversified portfolio, offering exposure to inflation beneficiaries and durable companies that provide long-term growth potential.
- Inflation Hedge: As an alternative to traditional inflation-linked securities, INFL provides a broader approach to managing inflation risk, making it a valuable addition to portfolios seeking inflation protection.
- Diversification Tool: For investors looking to diversify away from traditional index funds, INFL offers a unique blend of real assets and value-driven investments, enhancing overall portfolio diversification.
- Yield Enhancement: With its variable yield structure, INFL can be used to enhance income generation in a portfolio, providing a reliable source of dividends in an inflationary environment.
Looking ahead, Horizon Kinetics remains optimistic about the future prospects of the INFL ETF. The current economic environment, characterized by elevated inflation and moderate growth, aligns well with the fund’s strategy. As global markets continue to evolve, INFL is well-positioned to capitalize on opportunities and deliver strong returns for investors.
Davolos emphasizes the importance of durability and adaptability in investment strategies. With a focus on value and durability, INFL invests in companies with strong balance sheets that can withstand economic uncertainties such as interest rate changes and geopolitical tensions.
The fund’s approach considers factors beyond the traditional economic indicators, emphasizing employment and price stability within a framework that tolerates moderate inflation rates. This allows INFL to thrive in an environment of 3% to 5% inflation, offering a balanced approach that supports nominal growth while maintaining stability.
The Horizon Kinetics Inflation Beneficiaries ETF represents a significant innovation in the world of investment. Its unique, research-driven approach to managing inflation and market cycles has made it a standout choice for financial advisors seeking robust, all-weather investment solutions.
For those interested in learning more about the fund and its strategy, Horizon Kinetics offers extensive research and insights on its website, providing valuable resources for advisors looking to make informed investment decisions.
_____________________
Additional Resources
- Contact Horizon Kinetics
- Royalties as an Asset Class
- Horizon Kinetics Inflation Beneficiaries ETF (INFL) Factsheet
- Horizon Kinetics INFL Overview
- INFL: An Active Approach to Inflation Risk
- INFL: Actively Managed Returns Through Market Regimes
______________________
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.
