The stock market’s biggest problem right now isn’t tariffs—it’s denial.
After months of relatively calm markets supported by a broadening rally across industrial and value shares, volatility returned following renewed trade-war rhetoric from President Donald Trump. The comments included the possibility of higher tariffs on Europe. Markets reacted swiftly, with equities falling and gold prices rising, underscoring how geopolitical developments can disrupt valuation-driven market trends.
A Market Priced For Peace
Positioning shows that investors were not ready. Volatility protection, as measured by VIX, is at an eight-year low, as per Bank of America’s latest survey, cited in a Yahoo Finance report. The cash level is at record lows, and equity allocation is at its highest level since December 2024, while the S&P 500 trades at 23 times forward earnings, well above its historical average.
That combination leaves little margin for surprise. Tariffs, on the other hand, specialize in surprises.
Volatility ETFs: Fast, Sharp, Tactical
For investment professionals looking to go direct for market volatility, volatility-linkedETFs have suddenly become relevant again. Funds such as ProShares VIX Short-Term Futures ETF (BATS:VIXY) and ProShares Ultra VIX Short-Term Futures ETF (BATS:UVXY) have been designed to increase when volatility increases.
These funds can offer incredible short-term protection during selloffs, although their futures-based construction makes them lousy long-term holdings owing to roll decay.
Low Vol, But Still In The Game
Investors who do not want to leave equities altogether may favor low-volatility strategies. Both the iShares MSCI USA Min Vol Factor ETF (BATS:USMV) and the Invesco S&P 500 Low Volatility ETF (NYSE:SPLV) focus on companies whose stocks have exhibited relatively low price swings in the past, which should help to reduce portfolio volatility in dicey periods.
The good news is, these ETFs generally hold up better in moments of rising uncertainty, even if they lag during euphoric rallies.
Quality And Trend As Defence
Quality-focused ETFs, such as the iShares MSCI USA Quality Factor ETF (BATS:QUAL), focus on companies with strong balance sheets and stable earnings, which tend to be factors that really matter more when policy risk goes up.
Meanwhile, actively managed futures ETFs like the iMGP DBi Managed Futures Strategy ETF (NYSE:DBMF) will dynamically change with market trends and provide diversification at a time when equity correlations rise.
Gold Doesn’t Need A Press Conference
Unsurprisingly, gold is back in favor. ETFs like SPDR Gold Shares (NYSE:GLD) and iShares Gold Trust (NYSE:IAU) are once again serving as portfolio ballast amid political uncertainty and stretched equity valuations. Both the funds are up almost 4% on Tuesday.
With tariffs re-entering the conversation and volatility priced for perfection, ETFs built for rougher conditions may no longer look defensive. They may simply look prepared, something the broader market clearly wasn’t.
Image via Shutterstock/ Jack_the_sparow
Recent Comments