With the S&P 500 down roughly 16% year-to-date and high inflation persisting, more investors are turning to real assets to generate returns for their portfolios. The equity securities of companies connected to real estate, infrastructure, commodities, and natural resources tend to generate returns linked to inflation, since many of their cash flows are linked to contractual inflation escalators.
The war in Ukraine has also added to overall uncertainty, tightening energy markets and exacerbating supply chain issues.
“The war has accelerated the forces of deglobalization which has led to shorter and more secure supply chains,” . “This means greater capital expenditures and higher costs – adding to inflation and squeezing profit margins.”
One possible solution to combating supply chain concerns and benefiting from sectors benefiting from high inflation is the Donoghue Forlines Yield Enhanced Real Asset ETF (DFRA ), which 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 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. DFRA is up more than 7% YTD.
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.