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Revisiting Active ETFs to Hedge Against Inflation


Consumer prices rose more than expected in August due to rising rents and healthcare costs. While the headline CPI rose a seemingly modest 0.1% in August 2022, the Core CPI (removing volatile food and energy prices) rose by 6.3% at an annualized rate. As a result, the Federal Reserve again hiked interest rates by another 0.75% earlier this week.

While inflation began surfacing in fuel and food prices following Russia’s invasion of Ukraine, medical services, rental costs, and new vehicle prices all rose more than 0.7% during the month. These trends suggest that inflation may not be as transient as many economists hoped and sent markets sharply lower last week.

Investors looking for a hedge against rising inflation may consider actively-managed ETFs. Here are three options.

See our Active ETFs Channel to learn more about this investment vehicle and its suitability for your portfolio.


1. Inflation Beneficiaries ETF (INFL)


The Horizon Kinetics Inflation Beneficiaries ETF (INFL) is an actively managed ETF that seeks long-term growth in real (inflation-adjusted) terms. To do that, the fund invests in domestic and foreign equity securities of companies it expects will benefit from rising real asset prices, namely hard assets with capital-light business models.

For example, the company prefers royalty companies over producers, exchanges that benefit from more derivatives trading, real estate managers, and grain/seed processing companies. The unique nature of these companies means the strategy isn’t easy to replicate by investing in lower-cost index funds focused on energy or agriculture alone.

These strategies appeared to pay off as inflation soared over the past year. Between February 2021 and April 2022, the ETF rose more than 40% compared to just 20% for the S&P 500 index. But, of course, these results aren’t surprising given higher energy, metals, and agricultural prices stemming from the Russia-Ukraine conflict.


2. Quadratic Interest Rate Volatility & Inflation Hedge ETF (IVOL)


The Quadratic Interest Rate Volatility and Inflation Hedge ETF (IVOL) is an actively-managed fixed income ETF that aims to hedge relative interest rate movements while benefiting from market stress when volatility increases. With a low correlation to common asset classes, it’s also a great way to increase diversification.

In short, IVOL attempts to address the duration exposure of Treasury Inflation-Protected Securities (TIPS). As a result, the fund had a less pronounced drawdown than TIPS in March 2020, outperformed TIPS alone by more than 4% in Q1 2021, and continues to outperform with inflation resurfacing in Q2 2022.

Keep in mind that the fund could see a worse absolute performance if the yield curve flattens, TIPS bond prices move lower, or interest rate volatility declines. In other words, the fund is not an optimal ‘buy and hold’ investment in public companies but rather a hedge against current market conditions in the immediate future.


3. Home Appreciation U.S. REIT ETF (HAUS)


The Home Appreciation U.S. REIT ETF (HAUS) is an actively-managed fund that holds U.S. and TSX-listed REITs managing apartments, single-family rentals, or senior housing in the U.S. While the fund has suffered in recent months alongside the broader market decline, the fund could benefit from rising rental prices.

In a March 2022 interview with ETF.com, fund manager David Auerbach cited fundamental shifts in the market caused by the COVID-19 pandemic as possible tailwinds. Among other things, he notes that rising interest rates will make borrowing more expensive and push more people into single-family rentals and apartments.

These trends could take longer to play out than the other two funds on our list, but as rental prices continue to rise and interest rates rise, these housing trends could start to play out soon.


The Bottom Line


Consumer prices rose more than expected in August, signaling that inflationary challenges aren’t over. As a result, investors may want to consider actively-managed funds to mitigate the impact of inflation on their portfolios.

Take a look at our recently launched Model Portfolios to see how you can rebalance your portfolio.