A stagflation-like setup, in which inflation rises even as growth weakens, is beginning to take shape, and Goldman Sachs is anticipating it. The bank has raised its U.S. inflation forecast while lowering its growth outlook for this year, pointing to persistent energy-driven price pressures and rising downside risks to economic activity.

For markets, this is a difficult mix. Inflation erodes purchasing power, while slowing growth weighs on corporate earnings. So far, investors appear to be pricing in the inflation shock-but not fully the growth slowdown that could follow. That gap is where ETF strategies come into play.

Inflation Hedges: Commodities, Energy And TIPS Back In Focus

Goldman Sachs warns U.S. inflation can hit 4.9% by this spring if current disruptions persist. If this happens, it could hinder the Fed's strategic moves to bring inflation back to its 2% target. With energy prices being a major contributor to the inflation surprise, commodity ETFs are regaining traction.

Broad commodity funds that include crude oil exposure, as well as energy sector ETFs, directly benefit from supply chain issues and high energy costs.

For a more targeted exposure, investors may look at ETFs that track crude oil futures, such as the United States Oil Fund (USO  ), or energy sector ETFs such as the Energy Select Sector SPDR Fund (XLE  ) that tracking a group of major oil and gas companies that benefit from oil price spikes, like Exxon Mobil Corp (XOM  ) and Chevron Corp (CVX  ).

On the fixed-income side, there are inflation-linked bond ETFs such as the iShares TIPS Bond ETF (TIP  ), which provide a more defensive play, as they adjust their principal in line with inflation. These can help preserve real returns when price pressures remain high.

Finally, gold ETFs should also be considered in this mix. Although they are not a direct play on inflation, they have historically performed well in an environment where there is both inflation and geopolitical risk, and both of those factors are currently in play. ETFs like the SPDR Gold Shares (GLD  ) and the iShares Gold Trust (IAU  ) offer direct exposure to bullion and are often used as portfolio stabilizers during macro shocks.

Preparing For The Growth Slowdown: Defensives And Low-Volatility Plays

If Goldman's concerns about growth risks materializing turn out to be correct, then the cyclical parts of the market could be at risk. In fact, sectors such as industrials, consumer discretionary, and small-cap stocks are usually more vulnerable to an economic slowdown and may see their earnings estimates lowered.

On the other hand, defensive equity ETFs, especially those that focus on low volatility or high-quality stocks, could provide a measure of strength. For instance, the iShares MSCI USA Min Vol Factor ETF (USMV  ) holds stocks that have more stable earnings, lower leverage, and better balance sheets. Among its top holdings are Exxon Mobil, Verizon Communications Inc (VZ  ), and Cisco Systems Inc (CSCO  ), each reflecting the fund's defensive tilt-energy exposure benefiting from elevated oil prices, telecom providing steady cash flows, and technology infrastructure players offering resilience through recurring enterprise demand. USMV also has a beta of 0.76, which means it is less reactive to sharp market swings.

Dividend-focused ETFs can also play a role in smart positioning, as stocks with consistent profitability and pricing power are more likely to maintain their dividend policies even in an economic slowdown. Funds like the Vanguard Dividend Appreciation ETF (VIG  ) and the Schwab U.S. Dividend Equity ETF (SCHD  ) focus on high-quality companies with a track record of stable or growing dividends, making them relatively better positioned during uncertain times.

Bottom Line

The forecast by Goldman Sachs points to a complex market regime where inflation remains elevated even as growth slows. For ETF investors, that means moving beyond traditional playbooks.

A balanced approach may be key: combining inflation hedges like commodities, energy, and gold ETFs with defensive equity strategies and selective fixed-income exposure. Funds such as XLE, GLD, and USMV illustrate how investors can position across both sides of the macro divide.

If inflation is the first phase of this cycle and growth slowdown the second, the opportunity lies in preparing for both.