Red-hot inflation reading has been hitting headlines across the developed markets for a year or so. Though price levels started cooling this year, the figure is still stubborn. The annual inflation rate in the United States slowed to 6% in February of 2023, the lowest since September of 2021, in line with market forecasts, and compared to 6.4% in January.
Euro area annual inflation was 8.5 % in February 2023, down from 8.6 % in January 2023. The annual inflation rate in Japan rose to 4.3% in January 2023 from 4.0% in the prior month. This was the highest reading since December 1981. No wonder, ETF issuers have been scrambling to launch inflation-protected ETFs in one form or other.
We have seen many ETF launches on inflation protection in the recent past with the latest being First Trust Bloomberg Inflation Sensitive Equity ETF FTIF. Let’s delve a little deeper.
FTIF in Focus
The underlying Bloomberg Inflation Sensitive Equity Index invests primarily in U.S. exchange-listed companies within sectors that are expected to benefit, either directly or indirectly, from rising prices. The index picks U.S. exchange-listed companies from the Bloomberg U.S. 3000 Index in the energy, industrials, materials and real estate sectors.
The 50 largest companies by “free float” market capitalizations, relative to each of the four sectors, gets a place in the index. Total number of stocks in the fund is 50. No stock makes up more than 2.59% of the fund. Reliance Steel & Aluminum Co., Nucor Corporation and Cleveland-Cliffs Inc. hold the top three spots. The fund charges 60 bps in fees.
How Does It Fit in a Portfolio?
Per the issuer, the afore-mentioned sectors offered historically strong performance during inflationary cycles. Plus, the fund picks stocks that have high free-cash-flow yield. The fund also drops highly leveraged companies within each sector that tend to underperform during down markets.
Cyclical sectors tend to follow the economic cycle of expansion and recession. With the economy gaining momentum and inflation rising, these sectors are likely to fare well.
Competition
There are lot of products for beating inflation are available currently in the market. Amplify Inflation Fighter ETF IWIN may come across as a close competition. The fund IWIN includes an active mix of asset miners, commodities, land development, homebuilders, commodity REITs and real estate technology. The expense ratio of IWIN is 0.85%. This fund, however, failed amass assets.
The AXS Astoria Inflation Sensitive ETF PPI also follows the same kind of investment objective. Astoria Portfolio Advisors manage PPI by investing where the opportunities are: cyclical stocks (such as financials, energies, industrials and materials), commodities and TIPS. The fund charges 71 bps in fees. The fund PPI amassed about $68 million in assets so far, having made debut in Dec 2021.
We expect the newbie FTIF should amass sizable assets due to its exposure to safer sectors (not the ones like real estate technology that underperformed in a rising rate environment or long-struggling homebuilders). Plus, FTIF charges lesser expense ratio than its competitors.
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AXS Astoria Inflation Sensitive ETF (PPI): ETF Research Reports
Amplify Inflation Fighter ETF (IWIN): ETF Research Reports
First Trust Bloomberg Inflation Sensitive Equity ETF (FTIF): ETF Research Reports
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