Inflation, deflation, or stagflation. None of these scenarios sound too appealing, but there is still a way to protect one’s wealth through the markets and exchange traded funds (ETFs) in any possible outcome.

Analysts and experts are still debating whether the U.S. economy will experience inflation, deflation, or stagflation, remarks Lauren Young for Yahoo Finance.

Inflation fears stem from recent government stimulus plans that could cause prices to sky rocket. Deflation can develop as prices decline coupled with falling demand which would further fuel price cutting. Stagflation may occur as a result slow growth and increasing inflation.

Inflation. The large volumes of money smothering the banks has economists and financial advisers worried over inflation. The main sign of inflation can be seen through the Consumer Price Index (CPI).

How To Play It. Rising inflation would deteriorate asset value over the long-term for bondholders, and a way to combat this is through Treasury Inflation-Protected Securites (TIPS). Another way to hedge against inflation is through commodities, gold being a classic inflation hedge.

  • SPDR Barclays Capital TIPS (IPE): up 4.3% year-to-date
  • iShares COMEX Gold Trust (IAU): up 4.3% year-to-date

Deflation. A deleterious cycle can be created as banks stop lending, businesses halt expansions, wages fall, people reduce spending and prices would be driven further downward. The CPI is a good indicator for deflation.

How to Play It. Investors should look to short-term investment strategies, such as short-term certificates of deposit or money-market funds. But those with a 10-year time table could look into the technology sector since companies that seek to boost productivity will do so through technology.

  • PowerShares QQQ (QQQQ): up 15.3% year-to-date
  • PowerShares Dynamic Semiconductors (PSI): up 8.3% year-to-date

Stagflation. Stagflation is market by high inflation and slow economic growth. Lenders, households and businesses would be pessimistic about the markets, meaning that growth would come to a crawl. Shortage of production capacity will cause a rise in inflation. The misery index, a combination of unemployment and inflation rates, gauges the rate of stagflation.

How to Play It. Protecting your portfolio from stagflation is a real challenge. If stagflation is coming, investors may look into high-quality growth stocks (or in the case of ETFs, such funds that hold high-quality growth). Gold and/or TIPs can help ease some of the risk on the inflation side, as well.

  • RevenueShares Navallier Overall A-100 (RWV): up 5.3% since inception (note that this fund is a blend)
  • SPDR Dow Jones Large Cap Growth (ELG): up 6.8% year-to-date

For full disclosure, some of Tom Lydon’s clients own shares of QQQQ.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.