10 Best ETFs for Stagflation

First-quarter growth fell more than expected, rising at an annualized rate of 1.6%, according to the Bureau of Economic Analysis. That’s a slower growth rate than the forecast of 2.5%, and much lower than the 3.4% increase achieved in the fourth quarter.

Combine that with three months of inflation reports above consensus estimates, and you get two of the key ingredients of stagflation.

Fortunately, there are some exchange-traded funds that may offer potential hedges or opportunities during stagflation.  

In this article, we provide insight into how to navigate this environment with what have traditionally been considered the best ETFs for stagflation.

What Is Stagflation?

Stagflation is an economic environment that combines stagnant economic growth with high inflation. Imagine an economy stuck in neutral, where prices for goods and services are high and rising but businesses aren't expanding, and unemployment remains stubbornly high. This creates a double whammy for consumers, as their purchasing power shrinks while job opportunities dwindle.

In 2024, the only missing ingredient for full on stagflation is high unemployment, but investors are wise to educate themselves on the best types of investments to buy and hold in this challenging environment.

What Are the Best ETFs for Stagflation?

There isn't a guaranteed perfect ETF for stagflation, because stagflation is a complex economic condition with a combination of high inflation and stagnant economic growth. However, there are some types of ETFs that might perform better than others during stagflation. Here are a few to consider:

Commodity ETFs

During stagflation, commodities may perform well as they tend to retain value during periods of high inflation. Consider ETFs that track the prices of commodities such as gold, silver, oil, and agricultural products. Examples include:

• SPDR Gold Shares (GLD)
• iShares Silver Trust (SLV)
• United States Oil Fund (USO)
• Invesco DB Agriculture Fund (DBA)

Short-Term Treasury Bond ETFs

Short-term treasury ETFs can provide relative safety and liquidity during stagflation. While they may not offer high returns, they can help preserve capital in uncertain economic environments by providing high relative yields with low interest-rate sensitivity. Examples include:

• iShares Short Treasury Bond ETF (SHV)
• Vanguard Short-Term Government Bond ETF (VGSH)
• iShares 0-3 Month Treasury Bond ETF (SGOV)

Defensive Sector ETFs

Defensive sectors like consumer staples, healthcare, and utilities are generally considered good investments for stagflation. These sectors provide essential goods and services that people need regardless of economic conditions. Even during periods of high inflation and stagnant growth, people will still need electricity, healthcare, and basic consumer products. Examples include:

• Health Care Select Sector SPDR Fund (XLV)
• Utilities Select Sector SPDR Fund (XLU)
• Consumer Staples Select Sector SPDR Fund (XLP)

10 Best ETFs for Stagflation

Data as of April 26, 2024. See also: Short-Term Treasury ETFs: A Guide for Investors

Bottom Line on ETFs for Stagflation in 2024

While there is no single best ETF to buy for stagflation, there are a number of ETF types that tend to outperform the broader market averages during stagflation. These include commodity ETFs, short-term Treasury ETFs, and defensive sector ETFs.  

Other areas of the market that can perform relatively well in stagflation include Treasury inflation-protected securities (TIPS) ETFs, dividend ETFs and real estate ETFs. However, in 2024, with persistently high inflation and interest rates, investors have favored short-term Treasury ETFs, which have higher yields and lower market risk, and utilities ETFs for income generation combined with defensive qualities.

Stagflation can be a volatile economic period. Investors are encouraged to consider their risk tolerance and choose ETFs that align with their comfort level primary investment objectives.

It's important to remember that past performance is not necessarily indicative of future results and diversification is wise in uncertain environments.