Inflation ETFs could be in a good position even if the Fed cuts rates

It is an exchange-traded fund designed to take advantage of higher interest rates.

But even if the Federal Reserve starts making cuts this year, James Davolos of Horizon Kinetics thinks his company’s Inflation Beneficiaries ETF (INFL) is in a good place

“We are actually entering the mature phase of inflation,” the firm’s portfolio manager Davolos told CNBC’s “ETF Edge” this week. “I think we’re actually in the ideal position.”

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

“The Federal Reserve essentially conceded last week that we are going to prioritize the economy and jobs and accept these higher levels of inflation,” Davolos said. “I don’t think most wallets are well designed for that.”

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

According to Davolos, the ETF’s goal is to protect portfolios in a higher environment for longer periods of time by investing in companies that are considered “asset light” and “capital light.” FactSet shows as of April 30 that the Inflation Beneficiaries ETF’s top holdings include Wheaton Precious Metals, Prairie Sky Royalty And Viper energy.

So far this year, the ETF has underperformed S&P500 by about five percent. But Davolos thinks the gains of inflation-targeted ETFs are more stable over the longer term than the current mega-cap rally.

“We are in a new reality. People keep buying technology, I don’t realize we’re higher any longer, and there’s a duration aspect to those names,” Davolos said. “So I expect that to continue to reverse and continue to reverse sharply as we get through the rest of this year.”

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

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