ETFs Worth Watching as Debt Pressures Continue to Build

Currently standing at $38.65 trillion, the U.S. government’s increasing national debt continues to create an income problem for investors. The projected rise in large and sustained budget deficits between 2026 and 2036 is expected to push debt levels even higher over the next decade.

The Congressional Budget Office (CBO) projects the federal budget deficit at $1.9 trillion in fiscal 2026, rising to $3.1 trillion by 2036. As a share of GDP, the deficit is estimated at 5.8% in 2026 and will climb to 6.7% by 2036, exceeding the 50-year average of 3.8%.

More Into Rising U.S. Budget Deficits

According to Reuters, the continued increase in budget deficits underscores rising fiscal pressure in a low-growth environment. Per the abovementioned Reuters article, the U.S. deficit-to-GDP ratio reaching 6.7% by 2036 would significantly exceed Treasury Secretary Scott Bessent’s stated goal of bringing it down to about 3% of GDP.

As quoted on the Reuters article, the CBO said that the “One Big Beautiful Bill,” which extends the 2017 tax cuts and reduces spending on programs such as Medicaid, is expected to support consumer spending and private investment in the near term. However, the legislation is expected to increase U.S. deficits by $4.7 trillion over the next decade, while lower immigration adds a further $500 billion.

The CBO also stated that Trump’s tariffs revenues are projected to lower deficits by about $3 trillion over the period, factoring in broader economic effects and reduced interest payments on the debt, as reported by Reuters.

Debt-to-GDP Ratio on the Rise

Federal debt held by the public, currently at $30.92 trillion or 101% of GDP, is projected by the CBO to climb to $56 trillion or 120% of GDP by 2036. According to CBO’s publication, an additional $26 trillion in projected borrowing through 2036 would drive that increase.

The debt-to-GDP ratio compares a country's public debt to its GDP, reflecting its ability to repay debts relative to economic output. The high debt-to-GDP ratio of the United States indicates the difficulty that the world’s largest economy is facing in repaying its public debts, potentially leading to financial instability, default risks and a slowdown in the country’s economic activities.

According to Politico, the U.S. national debt is projected to approach $64 trillion within the next decade as persistent federal budget deficits continue to add to the total.

Rising national debt levels can create economic headwinds, including the risk of elevated inflation. If the government decides to repay its debt by increasing the money supply, it risks devaluing the currency, pushing up the inflation level.

ETFs to Consider

Preserving capital and cushioning volatility are key for investors looking to navigate a potentially tumultuous period. Investors should adopt a defensive and conservative investment theme in the near term, as it's better to be cautious than unprepared.

With ETFs offering diversification and tax efficiency, investors can use them to increase exposure to defensive funds. Investing in these sectors provides dual benefits, protecting portfolios during market downturns and offering gains when the market trends upward.

Below, we have highlighted several ETF areas that investors can consider to better navigate the uncertain debt environment and protect themselves from potential economic headwinds.

Consumer Staple ETFs

Increasing exposure to consumer staple funds can bring balance and stability to investors’ portfolios. Investors can put more money in consumer staples funds to safeguard themselves from potential market downturns.

Investors can consider Consumer Staples Select Sector SPDR Fund XLP, Vanguard Consumer Staples ETF VDC and iShares U.S. Consumer Staples ETF IYK.

Quality ETFs

Amid market uncertainty, quality investing emerges as a strategic response, providing a buffer against potential headwinds. This approach prioritizes identifying firms with robust fundamentals and lasting competitive strengths. Investing in such high-quality companies can mitigate volatility for investors.

Investors can look at funds like iShares MSCI USA Quality Factor ETF QUAL, Invesco S&P 500 Quality ETF SPHQ and JPMorgan U.S. Quality Factor ETF JQUA.

Multi-Asset ETFs

Diversifying the portfolio also comes across as an attractive investment strategy. A well-diversified portfolio distributes risk across multiple asset classes. Multi-asset ETFs could be a solid investment.

By combining stocks and bonds, multi-asset ETFs help reduce portfolio risk. Equities offer growth potential, while bonds provide income and act as a buffer during market downturns. This diversification can enhance risk-adjusted returns over time.

Investors can take advantage of the following funds to increase their portfolio diversification. iShares Core 60/40 Balanced Allocation ETF AOR, iShares Core 80/20 Aggressive Allocation ETF AOA, iShares Core 30/70 Conservative Allocation ETF AOK and Multi-Asset Diversified Income ETF MDIV can help investors diversify.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research