The Two Best Canadian ETFs For Fighting Stagflation

Despite the S&P/TSX 60 index delivering a respectable 9.6% return year-to-date as of June 22, the Canadian economy itself is showing some concerning signs beneath the surface.

The first is inflation. Canada's most recent inflation report showed consumer prices rising 3.2% year-over-year in May, a 20-month high driven largely by higher gasoline and food prices.

Neither category is particularly welcome because both tend to be highly visible to consumers and difficult to avoid. When households are paying more to commute and more to feed themselves, discretionary spending elsewhere often suffers.

The second concern is economic growth. Canada's gross domestic product (GDP) contracted for a second consecutive quarter, declining at a 0.1% annualized pace in Q1 2026 following a 1.0% decline in Q4 2025. By the textbook definition, that qualifies as a technical recession.

Some economists dispute that characterization because the labour market has remained relatively resilient. There is some merit to that argument. Canada's national unemployment rate currently stands at 6.6%, down from 6.9% the previous month. The picture becomes less encouraging when looking beneath the headline figures.

Unemployment varies considerably across provinces, with Alberta sitting at 6.6% while Ontario has climbed to 7.5%. Youth unemployment is even more concerning. Canadians between the ages of 15 and 24 currently face a 13.4% unemployment rate, suggesting that labour market weakness may be more pronounced than the aggregate numbers imply.

Taken together, these developments raise the possibility that Canada could be entering the early stages of a stagflationary environment. Stagflation occurs when economic growth slows or turns negative while inflation remains elevated. It is one of the most difficult macroeconomic environments for policymakers because the traditional tools used to address one problem often worsen the other.

If the economy weakens further, the Bank of Canada would normally consider lowering interest rates to stimulate growth. But if inflation remains stubbornly above target, cutting rates risks adding further price pressures. Conversely, maintaining higher rates to combat inflation can weigh on borrowing, investment, housing activity, and economic growth.

In other words, policymakers can find themselves caught between two undesirable outcomes. I'm not going to dive into the political debates surrounding how Canada should navigate this situation. This is an ETF-focused website, after all, and I'd rather stick to what I know best.

So, without further ado, here's a look at two Canadian ETFs that could potentially prove more resilient if stagflation becomes a more persistent feature of the economic landscape.

Global X Equal Weight Canadian Groceries & Staples Index ETF (MART)

When discussing inflation, it is always important to look beyond the headline number and examine the components driving it. After all, the Consumer Price Index (CPI) is ultimately a weighted basket of goods and services representing what Canadians typically spend money on.

The headline inflation figure simply aggregates all those categories together. In practice, though, some categories can rise much faster than others, and those are often the ones consumers feel most acutely.

One of the biggest examples today is food. While Canada's overall inflation rate recently came in at 3.2%, food inflation is running at 4.3% year-over-year, meaning grocery prices are increasing substantially faster than the broader basket of goods and services.

According to commentary from the Bank of Canada, much of the recent pressure has come from higher fresh vegetable prices, particularly tomatoes, driven by a combination of adverse weather conditions, tariffs, and transportation costs. The ongoing depreciation of the Canadian dollar relative to the U.S. dollar has not helped either, since many food products and agricultural inputs are priced in U.S. dollars.

For consumers, that's obviously frustrating. For investors, however, it creates an interesting opportunity. One way to hedge against rising food prices is to own the companies that benefit from them.

When Canadians talk about domestic oligopolies, the conversation usually centers around banks and telecommunications providers. Personally, I think grocery retailers deserve a place in that discussion as well. The sector has long been criticized for its concentration. Canadians may recall the bread price-fixing controversy, while others joke about dairy cartels whenever food prices become a political issue.

Regardless of where you stand on those debates, the important point for investors is that these businesses often possess substantial pricing power. Demand for groceries is relatively inelastic.

People still need to eat regardless of economic conditions. During periods of financial stress, consumers may trade down to discount formats such as No Frills, FreshCo, or Food Basics, but they're generally still shopping within the same corporate ecosystem.

That allows many grocery operators to pass through a meaningful portion of higher costs to customers. That may not be great news for shoppers. Morbid as it sounds, it can be beneficial for shareholders.

One of the easiest ways to target this relatively small segment of the Canadian market is through MART. The ETF tracks the Mirae Asset Equal Weight Canadian Groceries & Staples Index and currently holds just five companies: Dollarama, Empire Company, Alimentation Couche-Tard, Loblaw Companies, and Metro.

Sure, investors could simply buy each company individually and manage the weightings themselves. But for those looking for a more hands-off approach, MART packages the sector into a single ticker while maintaining equal exposure across its holdings.

The cost is also remarkably low. MART currently charges a 0.05% MER alongside a 0.02% trading expense ratio, making it one of the most affordable ways to gain targeted exposure to a corner of the Canadian market that could prove relatively resilient if food inflation remains elevated.

BMO Global Infrastructure ETF (ZGI)

I have always had a soft spot for infrastructure ETFs as a long-term portfolio allocation. Part of that comes down to the nature of the underlying assets themselves.

Infrastructure businesses tend to own hard-to-replicate physical assets that society depends on every day. Think pipelines transporting oil and natural gas across thousands of kilometers, railways moving freight between major cities, electric transmission networks, water systems, telecommunications towers, ports, and airports. These are not businesses that can easily be recreated by a new competitor.

More importantly, many of them generate highly predictable cash flows backed by long-term contracts, regulated returns, or concession agreements that can last decades. Once a pipeline is built or a transmission network is established, the focus often shifts from growth toward collecting steady revenue from assets that are already in place.

That cash flow profile also helps explain why infrastructure has historically been relatively resilient during inflationary periods. Many infrastructure contracts contain built-in inflation escalators that automatically increase fees over time.

Regulated utilities frequently receive rate adjustments tied to inflation or rising operating costs. Pipeline operators often have contractual provisions allowing them to pass through certain expenses. While no business is completely immune to inflation, infrastructure owners generally have more tools than most industries to preserve their purchasing power.

That became particularly evident during 2022, when many infrastructure companies held up better than the broader market despite rising interest rates and inflation.

Interestingly, infrastructure may also fare reasonably well in a stagflationary environment. At first glance, that sounds counterintuitive. Infrastructure is often capital intensive and economically sensitive, which would normally make it vulnerable during a recession.

The difference is that policymakers frequently view infrastructure spending as one of the more effective ways to stimulate economic activity without generating the same degree of inflationary pressure as direct consumer stimulus.

Infrastructure investment expands productive capacity. It improves transportation networks, energy systems, communications infrastructure, and logistics efficiency. It creates jobs, encourages private investment, and can help alleviate supply bottlenecks that contribute to inflation in the first place.

For investors looking to gain exposure to this theme, my preferred option for many years has been ZGI. At approximately $513 million in assets under management, it remains one of the larger infrastructure ETFs available to Canadian investors.

For a 0.61% management expense ratio, ZGI tracks the Dow Jones Brookfield Global Infrastructure North American Listed Index. To qualify for inclusion, companies must be listed in North America, maintain a market capitalization of at least $500 million, and average at least $1 million in daily trading volume over a three-month period. These requirements help ensure adequate size and liquidity across the portfolio.

The more important screen, however, relates to cash flow generation. To be eligible, at least 70% of a company's cash flow must come from the development, ownership, leasing, concession, or management of infrastructure assets. That helps keep the portfolio focused on businesses whose fortunes are directly tied to critical infrastructure rather than peripheral activities.

Today, the ETF holds 50 companies. Pipelines account for a significant portion of the portfolio through names such as Enbridge, Williams Companies, TC Energy, Kinder Morgan, and ONEOK. Utilities are also well represented through holdings such as National Grid and Sempra. The fund even includes communications infrastructure through companies like American Tower, reflecting the increasingly important role telecommunications networks play in the modern economy.

Income is respectable, although it is not the primary reason to own the fund. As of June 19, ZGI carried an annualized distribution yield of 2.19% paid on a quarterly basis. The bigger attraction has been total return. Over the trailing three-year period, ZGI delivered an annualized return of 15.11%.