This new inflation ETF is gaining steam. Here's how it works and what it's betting on

Published Sat, Feb 19 20227:34 AM EST

Jesse Pound @/in/jesse-pound @jesserpound

The rapid rise of inflation in recent months has sent investors and advisors scrambling for ways to protect their money, so one of them decided to create his own fix for the problem. John Davi, the CEO and chief investment officer at Astoria Portfolio Advisors, said his firm decided to create the AXS Astoria Inflation Sensitive ETF after trying to manage inflation exposure through existing options became unwieldy. "I said I think we should hedge inflation risk, and there really wasn't a good one-stop solution. So what we did is we put together 10 different ETFs, and then inflation got worse and worse, and then all of a sudden our portfolio had upwards of 20 different ETFs for our clients," said Davi, who has two decades of experience in the ETF industry. His firm then worked with AXS to create its own inflation ETF, with the idea that it could be used by retail traders to hedge inflation risk. The new fund, which trades under the ticker PPI, launched in late December and has seen strong inflow. Its assets under management have jumped above $30 million, according to FactSet, and it has generated a positive return — making it a dramatic outperformer of the broader market, albeit with an extremely small sample size. The fund is predominantly in stocks that have inflation-resistant qualities, with smaller allocations in commodities and Treasury Inflation-Protected Securities. The individual stocks are chosen by a five-factor model focused on metrics such as valuation, momentum and sensitivity to the consumer price index. The model looks at the financials, energy, materials and industrials sectors in both U.S. and non-U.S. stocks. "It's not like I'm just picking the lowest [price-to-earnings] stocks. … We're looking for cheap stocks with good growth prospects, strong momentum, that are high quality and have shown sensitivity to CPI," Davi said. Davi's team can then tweak the fund by adjusting the settings for exposure to different asset classes or to U.S. versus international stocks. He said the fund currently has about 85% in stocks, near the top of the fund's target range, but it expected that to decrease later in the inflation cycle. The fund's top equity holdings are titled toward energy and financials, with Marathon Oil , EOG Resources and Zions Bancorp . among the names appearing in its top-ten positions. Some other ETFs advertised as inflation-protective have seen strong interest in recent weeks as well, but the divergence in performance should serve as a reminder for investors to take a closer look under the hood at these funds before buying in. The funds can have significant differences in fees and underlying asset allocation. Here's a quick look at some of the notable inflation funds' performances through Feb. 17 and fee levels, according to FactSet. There are also other funds listed that are focused more directly on commodities or TIPS. Inflation fears are a dominant theme of the market right now, but Davi does not expect the interest from investors to be a passing fad. He said he expects inflation to be "structurally higher" in the years ahead, thanks to strong consumer demand and continued supply chain issues. "Corporations have pricing power. The brand new car at the lot is now [costing] you $5,000 more this year compared to last year. So if inflation goes down next year, if the Fed unwinds their balance sheet, is that car company going to reduce their price? Why would they if demand continues to be strong," Davi said. "So I think there's a new steady state for the cost of goods and services."

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The rapid rise of inflation in recent months has sent investors and advisors scrambling for ways to protect their money, so one of them decided to create his own fix for the problem.