Inflation ETF may be in a sweet spot even if Fed cuts rates

It’s an exchange-traded fund designed to profit from higher rates.

But even if the Federal Reserve starts to cut this year, Horizon Kinetics’ James Davolos thinks his firm’s Inflation Beneficiaries ETF (INFL) is in a sweet spot. 

“We’re actually going into the mature phase of inflation,” the firm’s portfolio manager Davolos told CNBC’s “ETF Edge” this week. “I think we’re actually ideally positioned.”

Davolos expects a new world stuck with inflation between three and five percent.

“The Federal Reserve basically just admitted last week that we’re going to prioritize the economy and employment and accept these higher inflation levels,” Davolos said. “I don’t think most portfolios are properly designed for that.”

Horizon Kinetics created the Inflation Beneficiaries ETF in January 2021 as inflation started to rise after the Covid-19 pandemic quarantine. Today, Davolos sees the fund as a strategic tool to help diversify investors’ portfolios.

According to Davolos, the ETF’s goal is to cushion portfolios in a higher for longer environment by investing in companies that are considered “asset light” and “capital light.” As of April 30, FactSet shows the Inflation Beneficiaries ETF’s top holdings include Wheaton Precious Metals, PrairieSky Royalty and Viper Energy.

So far this year, the ETF has underperformed the S&P 500 by about five percent. But Davolos thinks the gains from inflation-oriented ETFs have more long-term stability than the current megacap rally.

“We’re in a new reality. People keep buying tech, not realizing we’re higher for longer, and there’s a duration aspect to those names,” Davolos said. “So, I expect this to continue reversing and reversing sharply as we get through the remainder of this year.”

As of Friday’s close, the Inflation Beneficiaries ETF is up 30% since its inception.

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