- 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 best stocks in the portfolio – and Forlines’ thesis for each one.
Looking back, there was no better time than mid-December 2021 to launch an inflation-focused exchange-traded fund (ETF).
John Forlines, CIO of Donoghue Forlines, and his colleagues managed to time the launch of their new fund, the Donoghue Forlines Enhanced Yield Real Asset ETFs (DFRA), Perfectly. The fund is up 8% since inception and 4.5% in 2022 through April 27, compared to an 11.7% year-to-date decline for the S&P 500, and it has also exceeded 98% of competitors in its category this year, according to Morningstar.
Inflation, which is currently at a 41-year high, is particularly difficult to predict and prepare for right now, Forlines told Insider in a recent interview. The investment chief noted that “this inflationary cycle did not start in the traditional way” and is now largely driven by supply and demand mismatches – not just typical price pressures at the market. beginning of an economic cycle.
Rising prices are a sign of a healthy, growing economy when it’s happening at a slow, steady pace, though it quickly becomes problematic when it spirals out of control. The strong economic recovery after the onset of the pandemic ended what was a regime of low growth and low inflation in the years following the financial crisis, Forlines said.
“Everything changed in 2020 when the whole world was shut down,” Forlines told Insider. “What we’ve done since then is a lot of catching up to rebuild supply lines and trying to establish which economies are open. And that’s been incredibly crippled by the fact that – almost to a nation – every nation possible went to a COVID response differently.”
The most glaring example of a pandemic policy that has worsened inflation is the so-called “zero COVID” strategy, where a sick worker can shut down a factory for weeks. The shutdowns lead to supply chain issues that cause bidding wars for goods, driving up prices. Supply issues — and inflation — should improve soon, Forlines said, but it’s unclear when exactly that will happen.
“The response to the pandemic that really created the high consumption-based inflation that we have now, this element – the very high impressions that we made on CPI – it’s probably very close to a peak,” Forlines said. “What you will find is that over the next six months of the year, it will slowly dissolve as the chains of supply will improve and China will reopen.”
How to Invest Successfully as Inflation Rises
Instead of picking assets to enter the Donoghue Forlines Enhanced Real Assets ETF, Forlines and its three peers on the investment committee who 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 returns,” Forlines said, adding that it is designed to adapt over time.
The three main criteria sought by the ETF’s model are, Forlines said: strong free cash flow, high-quality earnings and high dividend yields. Investments that tend to meet these requirements include real estate investment trusts (REITs), commodities, natural resources and stocks in the infrastructure and oil and gas sectors, the CIO added.
While strong free cash flow and high quality earnings reflect the underlying health of a business, high dividend yields are especially crucial in a high inflation regime. Commodities and real assets that offer investors regular cash payouts are hot right now, and Forlines said the trend “probably has three more years to go.”
“There’s going to be a yield hunt for a long time,” Forlines said. “Because you won’t be able to get it in some places.”
Forlines continued: “We haven’t had an attractive market for these types of assets for a long time. The best we had was to get out of this commodity
in 2015, but it’s already been seven years.”
7 stocks to watch
Forlines may not have picked the stocks of 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 happy to provide the thesis. of some of the fund’s major holdings.
“One of the things that I like about this model that we’ve designed is that there’s a logical reason every time you want to talk about it,” Forlines said. “In other words, I never say, ‘Oh, I don’t know why it’s in there.’ I always think, ‘Yeah, I got it.'”
Below are seven of the ETF’s top holdings, along with the ticker, market cap, and Forlines thesis for each. In some cases, stocks in the same industry had the same thesis.