First Trust has launched a new ETF in the US targeting stocks of high cash flow companies from sectors that have historically performed well during inflationary cycles.
Ryan Issakainen, Senior Vice President, ETF Strategist at First Trust.
The First Trust Bloomberg Inflation Sensitive Equity ETF (FTIF US) has been listed on NYSE Arca with an expense ratio of 0.60%.
According to First Trust, the fund is designed to deliver a durable return stream that has the potential to keep pace with inflation. It does this through a rules-based approach that focuses on financially robust companies within the energy, industrials, materials, and real estate sectors.
Ryan Issakainen, Senior Vice President and ETF Strategist at First Trust, said: “We believe that high inflation is one of the most important challenges that investors are facing in 2023. High-quality stocks from sectors that have historically benefitted from rising prices may help investors navigate this environment.”
Methodology
The fund is linked to the Bloomberg Inflation Sensitive Equity Index which selects its constituents from an initial universe comprising the 50 largest US-listed companies within each of the above four sectors.
The methodology first removes the 10% of firms within each sector that have the highest debt-to-market capitalization ratios.
The remaining companies are then ranked based on two inflation-related metrics: beta to two-year inflation breakeven and beta to Bloomberg Commodity Index. Within each sector, 50% of companies with the lowest combined inflation metric scores are removed.
From the remaining universe, the methodology selects the 50 companies with the highest free-cash-flow yield over the previous 12 months subject to a maximum of 20 stocks from any single sector.
Constituents are equally weighted, and the index is reconstituted and rebalanced semi-annually.
As of 14 March, materials and energy stocks represented the largest sector exposures with weights of 32.7% and 31.0%, respectively, followed by industrials (20.2%) and real estate (16.2%).
Investors interested in this strategy may wish to consider the Horizon Kinetics Inflation Beneficiaries ETF (INFL US), an actively managed fund that also invests in companies positioned to benefit from inflationary pressures. According to the ETF’s investment manager, Horizon Kinetics, such firms include exploration and production companies, mining companies, transportation companies, infrastructure, and real estate companies, with an emphasis on so-called ‘asset-light’ businesses with royalty, streaming, rental, brokerage, management, and leasing exposure. Despite launching in January 2021, INFL has already accumulated $1.2bn in assets. Its expense ratio is 0.85%.