What’s Inflation & Why Worry?

Inflation is the decline of purchasing power of a given currency over time. If you had purchased a meal for $10 a few years ago, you would have to spend $20 for the same quantity and type of food. Inflation is a measure of the buying power of a dollar or any currency. It tells us how much more an item will cost down the road due to the costs of producing something (labor, materials, etc.) going up over time. That loaf of bread that you buy today for $2 would have only cost about 50 cents a few decades ago. On the flip side, that loaf of bread will cost $4 to $6 in a couple of decades due to inflation.

With all that being said about inflation, let’s focus on how to invest in Inflationary Periods?

I prefer the ETF route because of the reasons mentioned below, but not limited to:

1. A professional fund manager manages it
2. The fund house takes care of the stocks, allocation, rebalancing, etc.
3. All that I have to do is “Know What ETFs to BUY & When to BUY & SELL.”

Without much further ado, The Two ETFs with which you can invest in Inflation are:

1. INFL — Horizon Kinetics Inflation Beneficiaries ETF
2. FCPI — Fidelity Stocks for Inflation ETF

There could be several asset classes and multiple ways to hedge your portfolio or invest during inflation. My easiest choice is to go the equity ETF way which I understand better than any other asset class. 

INFL — Horizon Kinetics Inflation Beneficiaries ETF

The Horizon Kinetics Inflation Beneficiaries ETF is an actively managed ETF that seeks long-term growth of capital in real (inflation-adjusted) terms. It seeks to achieve its investment objective by investing primarily in domestic and foreign equity securities of companies that are expected to benefit, either directly or indirectly, from rising prices of real assets (i.e., assets whose value is mainly derived from physical properties such as commodities) such as those whose revenues are expected to increase with inflation without corresponding increases in expenses.

The top 10 holdings account for 43% of the total portfolio.

The Good:

1. INFL is appropriate for investors looking for short-term inflation protection. 
2. Exposure to global companies
3. Targeted Exposure toward Inflation beneficiaries
4. The ETF may hold companies involved in Exploration and Production, Mining, Transportation, Infrastructure, and Real estate (emphasizing “asset-light” businesses with royalty, streaming, rental, brokerage, management, and leasing exposure). INFL may also have significant exposure to securities exchange companies.

5. Exposure to most developed economies with 51% exposure to the US equities. 

6. With the total number of holdings at 40 (a concentrated portfolio), the ETF yields 1.13% (based on the current market price)

The Bad:

1. The ETF was incepted on 01-Nov-2021, and it is not even barely a year old — The fund has a limited history, only going back a few years. Thus, investors have to know that INFL ETF may not be a BUY & HOLD forever and may come in handy during periods of high inflation.
2. The expense ratio is 0.85% — meaning investors will pay $85 annually as a management fee for every $10,000 invested. Personally — I feel this is expensive for an inflation play.
3. The ETF holds more small caps — and thus, one has to be ready for higher volatility than the mega and large caps.
4. The total volume traded is relatively low, and there might be liquidity risk. Hopefully, the volumes will pick up as the ETF gains popularity in the coming months. 

I expect INFL not to show outperformance in terms of stock price appreciation; instead, investors can expect a lower drawdown when the S&P 500 or broader market falls. 

For more information, risks, and disclosures on INFL — please visit Horizon Kinetics.

FCPI — Fidelity Stocks for Inflation ETF

FCPI provides exposure to large- and mid-cap US equities that tend to outperform in inflationary environments. The index starts with the top 1000 US companies by market cap; each is ranked and scored based on value, momentum, and quality factors. The final selection is approximately 100 stocks, based on market cap within each sector. Each stock is equally weighted plus an overweight adjustment depending on its sector. Sectors such as energy, materials, consumer staples, health care, real assets, and infrastructure receive a +5% overweight in the portfolio. 

FCPI is appropriate for investors looking for short-term inflation protection. 

I expect FCPI to show a combination of stock price appreciation and lower drawdowns during inflationary periods. For more information, risks, and disclosures on FCPI— please visit Fidelity.

FCPI vs. INFL — The Verdict:

Comparing FCPI and INFL (assuming no other asset class is considered for comparison), investors have to understand that these ETFs are to be used only during periods of high inflation and one has to understand the risks and nuances if investing for the long-term. 

FCPI has the least expense ratio with a slightly higher yield; delivering a better one-year performance will conclude that FCPI is a better hedge for inflation protection. 

However, with a limited track record of less than a year, we could test INFL, FCPI, and SPY. Based on the limited data available, investors can witness that INFL outperformed by delivering positive returns and demonstrating minimal drawdown.