ETFs to Defend Your Portfolio Against Inflation

As the chaotic tariff policy of the Trump administration continues to fuel inflationary fears, a survey by the University of Michigan, as quoted by Reuters, revealed that consumers expect inflation over the next 12 months to rise to 6.7% from 5% in March, the highest level since 1981.

Consumers anticipate high inflation levels to be a long-term concern, with prices likely to rise at an annual rate of 4.4% over the next five years. This is expected to add to volatility in U.S. markets, amid rising recessionary fears and concerns of an economic slowdown.

A drop in consumer sentiment, fueled by escalating trade war tensions and rising inflation fears, is another key concern. According to the survey, U.S. consumer sentiment plunged to 50.8 in April from 57.0 in March.

Consumer Confidence Collapses to Record Lows

According to the Survey by the University of Michigan, as quoted on CNN, the consumer sentiment recorded a preliminary reading of 50.8 in April, falling 11% from the previous month. April’s reading was down more than 30% since December, and the lowest since the Great Recession.

Consumer sentiment is clearly shifting from last year’s highs, with recession fears gaining momentum as factors threatening U.S. economic stability, such as declining consumer confidence, sluggish growth and persistent inflationary pressures, persist.

Per its recent projections, the IMF slashed its U.S. growth forecast by 0.9 percentage points, currently estimating the economy to grow at 1.8% in 2025, citing weaker consumer confidence and spending as key reasons for the downgrade.

Trade Tensions Heat Up Inflation Projections

According to JPMorgan Chase CEO Jamie Dimon, as quoted on CNBC, the tariffs announced by President Donald Trump could drive up prices on both domestic and imported goods, further putting pressure on an already slowing U.S. economy.

Several Fed officials also share the same view, projecting that escalating trade tensions will likely add to inflationary pressures, as quoted on Investopedia. According to Investopedia, one estimate suggests that if Trump’s highest proposed tariffs are fully implemented, U.S. inflation could rise to 4.7% by the end of 2025.

The IMF lifted its inflation forecasts for advanced economies, as CNBC quoted, raising the inflation outlook for the United States to 3% for 2025, marking an increase of one percentage point from its previous projections in January.

According to Reuters, U.S. bond funds saw $10.07 billion in net outflows in the week leading up to April 16, reflecting investor concern that Trump’s tariffs may drive inflation and increase recession risks.

Exploring ETFs

Below, we have highlighted a few ETF areas that investors may consider expanding their exposure to, as the risk of rising inflation increases.

For risk-averse investors, boosting exposure to defensive funds and keeping a long-term investment horizon can be a smart strategy in the current economic situation.

Gold ETFs

Gold, a safe-haven investment during a challenging period, remains a secure choice amid economic and geopolitical instability. Across extended investment periods, gold preserves its purchasing power, outpacing inflation. It is a valuable tool for portfolio diversification due to its historical tendency to have a negative correlation with other asset classes.

Investors can consider funds like SPDR Gold Shares GLD, iShares Gold Trust IAU and SPDR Gold MiniShares Trust GLDM.

Increasing exposure to commodity ETFs can be a smart play to reduce overall portfolio risks when inflation is expected to rise. Commodities are often considered a hedge against inflation as they typically rise when inflation is accelerating and offer protection from the effects of higher prices.

Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF PDBC and Invesco DB Commodity Index Tracking ETF DBC can be considered.

Value ETFs

Value stocks have a track record of long-term outperformance and resilience against market trends. Characterized by solid fundamentals such as earnings, dividends, book value and cash flow, these stocks trade below their intrinsic value, representing undervaluation.

Vanguard Value ETF VTV, iShares Russell 1000 Value ETF IWD and iShares S&P 500 Value ETF IVE, having a Zacks ETF Rank #1 (Strong Buy) or #2 (Buy), could be appealing options.

Dividend ETFs

Dividend-paying securities serve as primary sources of reliable income for investors, particularly during periods of equity market volatility. These stocks offer dual advantage safety, in the form of payouts, and stability in the form of mature companies that are less volatile to large swings in stock prices. Companies offering dividends often act as a hedge against economic uncertainty.

Investors can consider Vanguard Dividend Appreciation ETF VIG, Schwab US Dividend Equity ETF SCHD and Vanguard High Dividend Yield Index ETF VYM, with dividend yields of 1.92%, 4.09% and 3.5%, respectively. 

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