Inflation Risks Likely to Persist: ETFs Worth Watching Now

Inflation concerns have regained prominence as a key risk for investors. Since the onset of the Middle East conflict, the risk of oil-driven inflation has intensified, amplifying market unease.

The year 2026 has been far from favorable, marked by heightened volatility. The CBOE Volatility Index, which reflects market expectations of near-term volatility, has surged 74.14% year to date. Against this backdrop, rising inflationary pressures could further cloud the outlook for investors.

In his annual shareholder letter, Jamie Dimon, CEO of JPMorgan, cautioned that the war in Iran could lead to significant oil and commodity price shocks, potentially sustaining inflationary pressures and pushing interest rates beyond current market expectations, as quoted on Reuters.

Additionally, John Williams noted that the Middle East conflict has heightened uncertainty, raising the likelihood of higher inflation while also increasing the potential for an economic slowdown. Per Williams, Federal Reserve Bank of New York President, the impact of surging energy prices is likely to take time to fully filter through the economy, as quoted on another Reuters article.

Investors have grown increasingly anxious about the risk of stagflation, an economic condition marked by the combination of slowing growth, rising inflation and high unemployment occurring simultaneously.

Rising Energy Prices Stoke Inflation Concerns

Energy-driven inflation has emerged as a key headwind for investors. The recent surge in oil prices has reignited inflation concerns, as elevated energy costs risk spilling over into broader price pressures, complicating central bank policy and adding to market unease.

U.S. crude benchmark West Texas Intermediate (WTI) has risen approximately 23.94% over the past month, extending its year-to-date gain to about 50.46%, according to OilPrice.com.

Structural factors, including supply constraints and damage to regional energy infrastructure, are expected to play a larger role in supporting oil prices, potentially keeping them elevated even after the conflict concludes.

ETF to Play as Inflation is Expected to Stay

In the current environment, a tilt toward defensive funds, combined with a long-term investment approach, appears prudent. Diversification, paired with a long-term outlook, remains key to navigating the uncertainty.

Rising inflation and broader economic headwinds are likely to weigh on investor finances, encouraging a more cautious, risk-aware approach and a reassessment of portfolios. For those with allocations skewed toward higher-risk assets or limited diversification, a gradual shift toward a more balanced risk profile may be prudent.

Below, we have highlighted a few ETF areas that investors may consider increasing exposure to as inflation risks rise, helping protect portfolios from potential economic headwinds.

Commodity ETFs

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, iShares S&P GSCI Commodity-Indexed Trust GSG, Invesco DB Commodity Index Tracking ETF DBC and First Trust Global Tactical Commodity Strategy ETF FTGC can be considered.

Quality ETFs

Amid market uncertainty, quality investing emerges as a strategic response, providing a buffer against potential headwinds. 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, JPMorgan U.S. Quality Factor ETF JQUA and Fidelity Quality Factor ETF FQAL.

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, Avantis U.S. Large Cap Value ETF AVLV and Vanguard Small Cap Value ETF VBR.

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Vanguard Value Index Fund ETF Shares (VTV): ETF Research Reports

Invesco DB Commodity Index Tracking ETF (DBC): ETF Research Reports

iShares MSCI USA Quality Factor ETF (QUAL): ETF Research Reports

Invesco S&P 500 Quality ETF (SPHQ): ETF Research Reports

Vanguard Small-Cap Value Index Fund ETF Shares (VBR): ETF Research Reports

Fidelity Quality Factor ETF (FQAL): ETF Research Reports

iShares S&P GSCI Commodity-Indexed Trust (GSG): ETF Research Reports

Invesco Optimum Yield Diversified Commodity Stratgy No K-1 ETF (PDBC): ETF Research Reports

JPMorgan U.S. Quality Factor ETF (JQUA): ETF Research Reports

Avantis U.S. Large Cap Value ETF (AVLV): ETF Research Reports

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

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