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ETF Investing Strategies in Times of Stagflation

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The market is abuzz with high inflation risks and lower growth, meaning a stagflationary scenario for the most developed economies including the United States. Goldman Sachs says ”stagflation” is here, as quoted on CNBC. The latest Fed projections also point to the same fact (read: ETFs to Buy on Latest Fed Rate Hike and More Hereafter).

The Federal Reserve hiked its inflation forecast for this year. The central bank now expects the median inflation rate to jump to 4.3% this year, higher than its previous forecast of 2.6%. PCE inflation expectation has gone up to 2.7% for 2023 from 2.3% projected in December. The Fed downgraded its forecast for 2022 median real GDP growth from 4% in December to 2.8% for 2022. However, it kept the growth rate expectations same at 2.2% for 2023 and 2% for 2024.

The Fed raised interest rates last week by a quarter of a percentage point and projected that its policy rate would be in the range of 1.75% and 2% by the year's end in a newly aggressive stance to fight the red-hot inflation. Hence, new Federal Reserve projections indicate six more rate hikes this year, per CNBC.

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

In January 2022, Personal Consumption Expenditures (PCE) inflation rate was 6.1%. Dividend ETFs that offer current income more than the inflation rate could be an excellent choice. Invesco KBW High Dividend Yield Financial ETF (KBWD - Free Report) (yields 6.69%), Virtus WMC International Dividend ETF (VWID - Free Report) (yields 6.44% annually) and Global X Alternative Income ETF (ALTY - Free Report) (yields 6.59% 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 - Free Report) is an investment-grade high-yield bond ETF, which yields 6.96% 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 - Free Report) yields 12.38% annually. However, the fund is a risky bet in any kind of global market meltdown 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 - Free Report) yields about 2.48% 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. Employment in the healthcare industry increased by 64,000 in February. Job gains occurred in home health care services (+20,000), offices of physicians (+15,000), and offices of other health practitioners (+12,000) (read: 6 Sector ETFs That Show Promise After Jobs Data).

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