Fearing Stagflation? ETF Strategies to Win

The market is abuzz with high inflation risks and lower growth, meaning a stagflationary scenario for the most developed economies including the United States. The latest Fed projections and comments also point to the same fact.

Wall Street was downbeat last week mainly due to Federal Reserve Chair Jerome Powell’s comments at the Jackson Hole economic symposium that the central bank will remain committed to fight inflation. Powell said that we have to bear 'some pain' now or 'far greater pain' later. So, rate hikes will continue to tame inflation.

In a LinkedIn post in June, Bridgewater’s Ray Dalio cautioned that Fed’s tightening could result in stagflation, as quoted on MoneyWise, published on Yahoo Finance. During stagflation, individuals’ savings accounts suffer as currency inflation cuts the value of their low-yield investments. Hence, one needs to resort to the stock market for inflation-beating gains. Against this backdrop, below we highlight a few ETF strategies that could safeguard your portfolio.

Try Out Inflation-Beating Products

The personal consumption expenditure price index in the United States dropped 0.1% sequentially in July of 2022, after jumping 1% in June which was the largest increase since September 2005. The annual rate slackened to 6.3% from 6.8% in June, which was the highest reading since January 1982.

Dividend ETFs that offer current income more than the inflation rate could be an excellent choice. Invesco KBW High Dividend Yield Financial ETF KBWD (yields 9.32%), Virtus WMC International Dividend ETF VWID (yields 7.59% annually) and Global X Alternative Income ETF ALTY (yields 7.74% annually) are some of the ETFs that can be tried out in the current volatile market (mainly due to the Russia-Ukraine war). As far as financial ETFs are concerned, the Fed rate hikes should result in a rising rate environment and favor financial ETFs.

High-Yielding Bond ETFs are Great Bets

At the maturity of bonds, investors receive the face value of the product. Meanwhile, products that offer inflation-beating current income could be great picks. FlexShares Credit-Scored U.S. Long Corporate Bond Index Fund LKOR is an investment-grade high-yield bond ETF, which yields 4.17% annually.

Private Equity ETFs: Another Inflation-Beating Option

Private equity is a way of catering to the capital of high-net-worth entities. This group acquires rights in high-potential companies lacking cash strength. Along with providing finances, these private-equity firms provide the know-how to run the acquired business in the most profitable manner. Invesco Global Listed Private Equity ETF PSP yields 11.61% annually. However, the fund is a risky bet in any kind ofglobal marketmeltdown but fares better when the market is rallying.

Consumer Staples: A Safe Option

The sector is enjoying a few benefits at this moment. Greater spending power in the wake of improving wage growth is helping the consumer segment. Moreover, the sector offers a decent dividend yield which is needed to beat inflation. Moreover, even if there is stagflation in the U.S. economy, demand for staples like food will be constant. Hence, U.S. staples manufacturers are likely to be another safe bet to invest in. Consumer Staples Select Sector SPDR ETF XLP yields about 2.42% annually.

Healthcare: Yet Another Safe Bet

Health Care Select Sector SPDR ETF XLV is another winning option as the sector’s demand is indispensable, irrespective of the economic condition. Job gains in the sector have also been steady. The fund XLV has a Zacks Rank #1 (Strong Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.