February 22, 2021 BARRON’S 7
ahead of the pace of price increases.
Stocks weren’t much of an inflation
hedge, however. The Dow Jones Indus-
trial Average briefly topped 1000 in Janu-
ary 1966 but didn’t close above that mark
again untilNovember 1972. After the
massive bear market of 1973-74, which
took the Dow to a nadir of 577, the indus-
trials wouldn’t reclaim the 1000 level
again until December1982, inthe early
days of that bull market.
Far better was an innovation of the
1970s—the money-market fund—which
permitted regular folks to earn double-
digit yields. After taxes and inflation,
money funds often didn’t keep pace in real
terms, but they beat bank interest rates,
which were still regulated. Gold soared
after Americans were permitted to own it
again, topping out at over $800 an ounce
in early 1980, a roughly 20-fold increase.
Oil stocks were also big winners as energy
came to command the biggest weighting in
the equity market.
Times certainly have changed. Even
though theEnergy Select Sector SPDR
exchange-traded fund (XLE) has enjoyed a
30% pop over the past three months, it still
shows a negative 10.3% total return over the
past 12 months, according to Morningstar
data. And over the past decade, it’s been a
loser even after generous dividends, with a
negative 2% annual return. Meanwhile, the
SPDR Gold SharesETF (GLD), which
tracksbullion’s price, has sputtered so far
this year, with a negative 6.75% return after
2020’s 24.8% return. As for money-market
funds, they pay perhaps a vestigial 0.01%,
if that.
Two relatively new ETFs look to offer
protection from inflation but take different
tacks inaiming for that objective.
TheQuadratic Interest Rate Volatility
and Inflation HedgeETF (IVOL),
launched in May 2019, uses Treasury infla-
tion-protected securities, or TIPS, and in-
terest-rate derivatives to hedge against infla-
tion and fixed-income volatility. Even newer
is theHorizon Kinetics Inflation Benefi-
ciariesETF (INFL), just launched in Janu-
ary, which concentrates on stocks the man-
agers think will benefit from inflation.
IVOL, to use its ticker instead of its jaw-
breaking official name, is headed by Nancy
Davis, who was amongBarron’s100 Most
Influential Women in U.S. Finance in
2020. She founded Quadratic Capital in
2013 after stints at Goldman Sachs and
AllianceBernstein.
While many investors aim to hedge infla-
tion with commodities, stocks, or real as-
sets, most look first at TIPS. The main prob-
lem with those inflation-indexed securities
is their long duration, which means they are
especially prone to lower prices when their
yields rise, Davis says. So IVOL adds fixed-
income options to counter that duration
risk, specifically ones based on the Treasury
yield curve (in this case, the difference be-
tween the two- and 10-year notes).
So far, the results have been positive,
with IVOL posting a 12-month return of
18.17%, including 2.81% so far in 2021,
while the bond market has sold off. Last
year’s performance included a positive
return during March’s meltdown, she
points out. By comparison, theiShares
TIPS BondETF (TIP) returned a much
lower 7.62% over the past 12 months and
minus 0.94% year to date.
INFL, managed by Horizon Kinetics, an
independent, New York-based outfit estab-
lished in 1994, eschews TIPS and com-
modity futures in favor of equities that
should benefit from inflation while gener-
ating superior returns over the entire eco-
nomic cycle.
The fund emphasizes companies that
are capital-light with exposure to hard
assets, the portfolio manager, James
Davolos, explains. For instance,Franco-
Nevada(FNV), one of its holdings, owns a
portfolio of royalties rather than gold
mines. Since gold’s previous peak of
$1,891.90 an ounce on Aug. 22, 2011, the
yellow metal is down 6.2%, while theVan-
Eck Vectors Gold MinersETF (GDX)
returned negative 48.1%. By contrast,
Franco-Nevadareturned 157% over that
span, according to FactSet data. Davolos
also sees exchanges such asCME Group
(CME) as beneficiaries of rising inflation.
Both funds are meant to complement a
typical portfolio. As discussed previously
here, the typical 60% stocks/40% bond
mix has worked wonderfully over the past
four decades of disinflation. Each time the
equity portion absorbed a hit, the bond
side rallied, as yields took another stair-
step down in each cycle.
Now, however, that cycle may be revers-
ing. The benchmark Treasury 10-year note
may have set its all-time, never-to-be-re-
peated bottom last March 9, which Dow
Jones data puts at 0.38%. Since then, the
yield has moved up to 1.30%. Given the
prospect of continued monetary accommo-
dation and even more fiscal stimulus, odds
are the future course of bond yields will be
successive higher highs and higher lows.
While there’s no telling how these ETFs
will fare, if the inflationary tide has
turned, the future of the old reliable 60/
portfolio isn’t likely to match its past.B
Up & Down Wall Street (continued)
- Jim Cullen, Chairman & CEO
For further information, please contact Schafer Cullen Capital Management
212.644.1800 • [email protected] • schafer-cullen.com
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nor, should it be construed as advice to meet a particular investment need. It should not be assumed that any
security transaction, holding or sector discussed has been orwill be profitable, or that future recommendations
or decisions we make will be profitable or equal the investment performance discussed herein. A list of all
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