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While the markets are abuzz with headlines about a likely recession in 2023, there is high chance that global economy will likely see stagflation this year. This is because inflation has already started showing signs of easing from late 2022 thanks to super-hawkish global central banks. The Fed has led the way by hiking rates massively last year.
The year 2023 should see inflation declining but price index at the strong level. This means slower growth. High inflation risks and lower growth, meaning a stagflationary scenario for the most developed economies including the United States.
The Fed rate hikes took the benchmark rate to the range of 4.25% to 4.5%, its highest level in 15 years in December. The policymakers also forecast that their key short-term rate will reach a range of 5.1% by the end of 2023, before being slashed to 4.1% in 2024. The Fed expects 2023 real GDP growth rate to be 0.5% and 2024 rate to be 1.6%.
During stagflation, individuals’ savings accounts suffer as inflation cuts the value of their low-yield investments. Hence, one needs to resort to the stock market for inflation-beating gains. Against this backdrop, below we highlight a few ETF strategies that could safeguard your portfolio.
Bonds Yields Better Current Income Than Dividends
Income investors can simply collect better gains through bonds. Bonds yield are fixed. If one investor holds a bond ETF until maturity, he/she can avoid uncertainty and enjoy solid current income. FlexShares Credit-Scored U.S. Long Corporate Bond Index Fund (LKOR - Free Report) charges 25 bps in fees and SEC Subsidized Yield is 5.86% annually. LKOR is up 1.5% past month (as of Dec 27, 2022).
As of Dec 27, 2022, the highest yield (4.75%) was provided by one-year U.S. treasuries. On the other hand, Global X SuperDividend U.S. ETF (DIV - Free Report) has lost 2.1% past month and yields 5.29% annually.
Senior Loan ETFs: Another Inflation-Beating Option
Senior loans are floating rate instruments and provide protection from rising interest rates. In a nutshell, a relatively high-yield opportunity coupled with protection from the looming rise in interest rates should help the fund to perform better. Highland/iBoxx Senior Loan ETF could thus be a good pick for the upcoming plays. It yields around 4.88% annually and charges 56 bps in fees. The fund lost only 3.7% past year, breezing past the S&P 500.
Consumer Staples: A Safe Option
The sector is enjoying a few benefits at this moment. Greater spending power in the wake of improving wage growth is helping the consumer segment. Moreover, the sector offers a decent dividend yield which is needed to beat inflation. Moreover, even if there is stagflation in the U.S. economy, demand for staples like food will be constant. Hence, U.S. staples manufacturers are likely to be another safe bet to invest in. Consumer Staples Select Sector SPDR ETF (XLP - Free Report) yields about 2.47% annually.
Healthcare: Yet Another Safe Bet
Health Care Select Sector SPDR ETF (XLV - Free Report) is another winning option as the sector’s demand is indispensable, irrespective of the economic condition. It is one of the few sectors that has been adding jobs constantly, indicating increasing activities in the sector.
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Stagflation in 2023? ETF Strategies to Follow
While the markets are abuzz with headlines about a likely recession in 2023, there is high chance that global economy will likely see stagflation this year. This is because inflation has already started showing signs of easing from late 2022 thanks to super-hawkish global central banks. The Fed has led the way by hiking rates massively last year.
The year 2023 should see inflation declining but price index at the strong level. This means slower growth. High inflation risks and lower growth, meaning a stagflationary scenario for the most developed economies including the United States.
The Fed rate hikes took the benchmark rate to the range of 4.25% to 4.5%, its highest level in 15 years in December. The policymakers also forecast that their key short-term rate will reach a range of 5.1% by the end of 2023, before being slashed to 4.1% in 2024. The Fed expects 2023 real GDP growth rate to be 0.5% and 2024 rate to be 1.6%.
During stagflation, individuals’ savings accounts suffer as inflation cuts the value of their low-yield investments. Hence, one needs to resort to the stock market for inflation-beating gains. Against this backdrop, below we highlight a few ETF strategies that could safeguard your portfolio.
Bonds Yields Better Current Income Than Dividends
Income investors can simply collect better gains through bonds. Bonds yield are fixed. If one investor holds a bond ETF until maturity, he/she can avoid uncertainty and enjoy solid current income. FlexShares Credit-Scored U.S. Long Corporate Bond Index Fund (LKOR - Free Report) charges 25 bps in fees and SEC Subsidized Yield is 5.86% annually. LKOR is up 1.5% past month (as of Dec 27, 2022).
As of Dec 27, 2022, the highest yield (4.75%) was provided by one-year U.S. treasuries. On the other hand, Global X SuperDividend U.S. ETF (DIV - Free Report) has lost 2.1% past month and yields 5.29% annually.
Senior Loan ETFs: Another Inflation-Beating Option
Senior loans are floating rate instruments and provide protection from rising interest rates. In a nutshell, a relatively high-yield opportunity coupled with protection from the looming rise in interest rates should help the fund to perform better. Highland/iBoxx Senior Loan ETF could thus be a good pick for the upcoming plays. It yields around 4.88% annually and charges 56 bps in fees. The fund lost only 3.7% past year, breezing past the S&P 500.
Consumer Staples: A Safe Option
The sector is enjoying a few benefits at this moment. Greater spending power in the wake of improving wage growth is helping the consumer segment. Moreover, the sector offers a decent dividend yield which is needed to beat inflation. Moreover, even if there is stagflation in the U.S. economy, demand for staples like food will be constant. Hence, U.S. staples manufacturers are likely to be another safe bet to invest in. Consumer Staples Select Sector SPDR ETF (XLP - Free Report) yields about 2.47% annually.
Healthcare: Yet Another Safe Bet
Health Care Select Sector SPDR ETF (XLV - Free Report) is another winning option as the sector’s demand is indispensable, irrespective of the economic condition. It is one of the few sectors that has been adding jobs constantly, indicating increasing activities in the sector.