Are Inflation Fears Back? ETFs May Help Protect Your Portfolio

The CBOE Volatility Index, which reflects market expectations of near-term volatility, has risen 9.2% over the past five trading sessions and 5.53% over the past trading sessions.

Softer inflation data in July led markets to pull back expectations for a September Fed rate hike. However, recent developments in the Middle East and the resulting surge in oil prices have reignited inflation fears, forcing investors to reconsider the outlook for price pressures.

A sustained rise in inflation expectations could reverse some of the recent decline in market expectations for a Fed rate hike later this year, complicating the Fed’s policy path and adding to uncertainty around investor sentiment and market expectations.

Behind the Renewed Inflation Concerns

According to a Reuters article, renewed inflation fears have emerged as hopes for a U.S.-Iran peace deal fade, with oil prices surging and government bond yields climbing to multi-year peaks. Per the article, the 30-year Treasury yield reached its highest level since 2007, while the benchmark 10-year yield approached its highest level since 2025’s January.

Higher oil price volatility could keep inflation expectations elevated. Oil prices rose on Monday as the 60-day window for a U.S.-Iran peace agreement came to an end, with Iran rejecting any extension, as per CNBC. Speaking with Reuters, a senior Iranian official stated that Iran could shift to a more offensive approach if diplomatic efforts with the United States collapse, as quoted on the CNBC article.

This suggests that a near-term diplomatic breakthrough leading to the reopening of the Strait of Hormuz and a U.S.-Iran peace deal remains unlikely, potentially keeping pressure on oil prices and inflation expectations.

Both West Texas Intermediate (WTI) crude and Brent crude surged, taking their gains over the past five trading sessions to 4.47% and 4.34%, respectively.

How to Position Your Portfolio for Rising Inflation

Rising inflation headwinds are likely to weigh on investor finances, encouraging a more cautious, risk-aware approach and a reassessment of portfolios. Investors with portfolios concentrated in higher-risk assets may benefit from gradually increasing diversification and adopting a more balanced risk profile.

Investors may consider increasing exposure to defensive funds to help navigate the current inflationary environment. However, maintaining diversification and a long-term investment horizon remains important and can help investors remain positioned for long-term growth.

Stay Ahead of Rising Inflation With These ETFs

Below, we have highlighted a few ETF areas that investors may consider increasing their exposure to as inflation expectations rise.

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 advantages: 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 1.47%, 3.06% and 2.19%, respectively. VIG and VYM both have a Zacks ETF Rank #1 (Strong Buy), whereas SCHD has a Zacks ETF Rank #2 (Buy).

Value ETFs         

Investors can leverage value investing, a strategy particularly compelling in today’s economic environment. Value investing through ETFs offers investors an easy and accessible way to follow this strategy. Value ETFs focus on stocks characterized by strong fundamentals and robust financial health, which trade below their intrinsic value.

Investors can consider Vanguard Value ETF VTV, Dimensional US Large Cap Value ETF DFLV and Avantis U.S. Large Cap Value ETF AVLV. Among the abovementioned funds, VTV has a Zacks ETF Rank #1 (Strong Buy). Regarding charging annual fees, VTV is the cheapest option, charging 0.03%.

Utility ETFs

As a low-beta sector, utilities are relatively shielded from market volatility, making them a defensive investment and a safe haven during economic turmoil. Investors often turn to utilities during downturns due to the steady demand for these companies' services.

Investors should gain from funds like Utilities Select Sector SPDR Fund XLU, Vanguard Utilities ETF VPU and iShares U.S. Utilities ETF IDU. All the mentioned funds have a Zacks ETF Rank #2 (Buy), with XLU being the cheapest option, charging an annual fee of 0.08%. Both XLU and VPU have a dividend yield of 2.71%.

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, consistent earnings 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. JQUA is the cheapest option among the mentioned funds.

Boost Your Portfolio with Our Top ETF Insights

Zacks' exclusive Fund Newsletter delivers actionable information, top news and analysis, as well as top-performing ETFs, straight to your inbox every week.

Don’t miss out on this valuable resource. It’s free!

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