- Donoghue Forlines’ inflation-focused ETF has beaten 98% of competing funds this year.
- John Forlines, a CIO who oversees the fund, shared the key to the model’s success.
- Here are seven of the top stocks in the portfolio — and Forlines’ thesis for each of them.
In hindsight, there was no better time than mid-December 2021 to launch an inflation-focused exchange-traded fund (ETF).
John Forlines, the CIO of Donoghue Forlines, and his colleagues managed to time the launch of their new fund, the Donoghue Forlines Yield Enhanced Real Asset ETF (DFRA), perfectly. The fund is up 8% since its inception and 4.5% in 2022 through April 27, compared to a 11.7% year-to-date decline for the S&P 500, and it has also outpaced 98% of competitors in its category this year, according to Morningstar.
Inflation, which is currently at a 41-year high, is especially difficult to predict and prepare for right now, Forlines told Insider in a recent interview. The investment chief noted that “this inflationary cycle didn’t start in the traditional way” and is now largely driven by supply-demand mismatches — not merely the typical pricing pressures at the start of an economic cycle.
Price growth is a sign of a healthy and growing economy when it’s at a slow, steady pace, though it quickly becomes problematic when it surges out of control. The robust economic recovery after the onset of the pandemic ended what was a low-growth, low-inflation regime in the years after the financial crisis, Forlines said.
“That all changed in 2020 when the whole world got shut down,” Forlines told Insider. “What we’ve been doing since then is a lot of catch-up on rebuilding supply lines and trying to establish which economies are open. And it’s been incredibly hamstrung by the fact that — almost to a nation — every possible nation went at a COVID response differently.”
The most glaring example of a pandemic policy that’s worsened inflation is China’s so-called “zero COVID” strategy, where one sick worker can close a factory for weeks. Shutdowns lead to supply-chain issues that cause bidding wars for goods, boosting prices. Supply issues — and inflation — should improve soon, Forlines said, but it’s unclear exactly when that will be.
“The response to the pandemic that’s really created the high, consumer-based inflation we have now, that piece of it — the very high prints that we’ve been doing on CPI — that’s probably very close to a peak,” Forlines said. “What you’ll find is that over the next six months to year, that will slowly dissolve as supply chains get better, and as China reopens.”
How to successfully invest as inflation rises
Instead of handpicking assets to go in the Donoghue Forlines Yield Enhanced Real Asset ETF, Forlines and his three counterparts on the investment committee that oversees the fund have created a model that chooses what the ETF invests in. The model aims to hold “real assets that can also produce yield,” Forlines said, adding that it’s designed to adapt over time.
The top three criteria the ETF’s model looks for are as follows, Forlines said: strong free cash flow, high-quality earnings, and lofty dividend yields. Investments that tend to meet those requirements include real estate investment trusts (REITs), commodities, natural resources, and stocks in the infrastructure and oil and gas industries, the CIO added.
While strong free cash flow and high-quality earnings reflect the underlying health of a company, the lofty dividend yields are especially crucial in a high-inflation regime. Commodities and real assets that provide investors with steady cash payments are in vogue right now, and Forlines said that the trend “probably has another three years to run.”
“There’s going to be a chase for yield for a long time,” Forlines said. “Because you’re not going to be able to get it in certain places.”
Forlines continued: “We haven’t had an attractive market for these types of assets in a long time. The best we had was coming out of that commodityin 2015, but that’s already seven years ago.”
7 top stocks to watch
Forlines may not have selected the stocks in the outperforming Donoghue Forlines Yield Enhanced Real Asset ETF, but as one of the people who designed the fund’s stock-picking model he was glad to provide the thesis for some of the fund’s top holdings.
“One of the things I love about this model we designed is that there’s a logical reason anytime you want to talk about it,” Forlines said. “In other words, I never say, ‘Oh, I don’t know why that’s in it.’ I always think, ‘Yeah, I got that.'”
Below are seven of the ETF’s top holdings, along with the ticker, market capitalization, and Forlines’ thesis for each. In some cases, stocks in the same industry had the same thesis.
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