Investors are currently challenged with the threat of persistent inflationary pressure. Additionally, traditional asset classes are not cheap. So, given that valuations for large-cap stocks are elevated and credit spreads are tight, real assets have become a core allocation to complement traditional investments. Real assets provide diversification, a hedge to inflation, and quality income.
In this environment, the Donoghue Forlines Yield Enhanced Real Asset ETF (DFRA ) has been having a strong year. While the S&P 500 is down nearly 14% year-to-date, DFRA is up 0.76%. It has also outpaced 98% of competitors in its category this year, according to Morningstar.
The fund is also up 4.56% since its inception.
DFRA seeks to provide investment results that closely correspond, before fees and expenses, to the performance of the FCF Yield Enhanced Real Asset Index, an investment strategy developed by FCF Advisors subsidiary FCF Indexes. The driver behind DFRA’s recent outperformance is its underlying index.
“The Index invests in high-quality real assets equities based on our Free Cash Flow Quality Model (FCFQM), which identifies companies with strong and sustainable profitability that have historically outperformed in a consistent manner,” said Vince (Qijun) Chen, an investment strategist from FCF Indexes. “By combining free cash flow investing with the goal of inflation hedge and enhanced income generations, the strategy outperforms not only the broad market index like S&P 500, but also the passive benchmark S&P Real Assets Equities Index this year.”
The fund invests primarily in U.S.-listed real asset companies of all sizes. This includes companies related to real estate, infrastructure, commodities, and natural resources.
Eligible securities are scored depending on their ability to generate profit and pay dividends using a fundamental evaluation that includes quality of earnings, free cash flow profitability, and dividend yield. Those that represent the top 25% of the scored equity universe are considered for inclusion.
Target weight is allocated to each security based on the combination of the three factors and market cap. Based on the target weight, the index selects up to 75 stocks or until 90% of the cumulative security weight has been included, whichever occurs first.
DFRA also provides a hedge against inflation as it looks to provide better risk-adjusted returns than broad market equities in periods of positive inflation surprises. It also seeks to generate a higher dividend yield than broad market equities and the market-cap-weighted real asset equities universe, with the potential of continuous dividend payments over the long term.
The fund applies FCF Advisors’ Free Cash Flow Quality Factor Model to seek alpha generation over a market-cap-weighted real asset equity universe.
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