Top inflation ETF portfolio manager breaks down strategy for $1 billion fund

Volatility and uncertainty in the market due to the ongoing conflict in Ukraine is benefiting inflation-based exchange-traded funds.

Inflation-resistant ETFs have become popular with investors in recent months amid rising prices and indications from the Federal Reserve that it will start raising interest rates again.

Most inflation ETFs are made up of stocks that tend to profit from inflation, such as mining, transportation, and real estate companies.

For the Horizon Kinetics Inflation Beneficiaries (INFL) ETF, the focus is on being “asset light,” its portfolio manager James Davolos told CNBC’s “ETF Edge” this week.

“A lot of these companies are going to have expenses that are as much or more than they can grow their revenue,” said Davolos, also a research analyst at his firm. “It’s really important to have a durable asset that can benefit from the inflation that generates your income.”

Major INFL holdings include Charles River Laboratories International Inc., Texas Pacific Land Corp. and ASX Ltd.

“As your revenue increases with many of these businesses, your margins will also increase,” he said. “Companies benefit doubly.”

INFL also owns shares of exchanges such as Deutsche Boerse, which accounts for more than 4% of the ETF’s assets. Margins and revenues can rise in the global trading complex with inflation, Davolos said.

“Right now all of these exchanges, ICE, CME, Deutsche Boerse, the ASX, they’re all printing record earnings,” he said. “It’s really a toll station on financial activity.”

INFL has over $1 billion in assets under management.

“These companies are going to generate very strong economic returns under the pre-inflation status quo,” Davolos said.

INFL is up over 28% since its launch in January 2021.

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